Hyatt Hotels Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Hyatt Hotels Corporation is a global hospitality company operating luxury hotels, select-service hotels, resorts, and vacation properties around the world, including management, franchising, ownership, and licensing activities.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Hyatt operates within a highly competitive and fragmented industry, making it challenging for any single company to establish an overwhelming moat.

Business Overview

Hyatt operates in the global hospitality industry. Their operations consist of a portfolio of luxury, full-service hotels, select-service hotels, resorts, and vacation properties across the world. Hyatt’s operations are divided among Owned and Leased properties (comprising upscale hotels and resorts and select service hotels) and Management and Franchising properties (primarily upscale and luxury hotels and resorts and few independent hotels), further categorized into geographic segments of Americas (including the United States, Canada, the Caribbean and Latin America), Asia Pacific (including Greater China and Australia), and Europe, Africa, and the Middle East (EAME/SW Asia).

  • Ownership Structure: Hyatt’s ownership model includes directly owning properties and leasing properties through sale-leaseback agreements, and also third-party hotel owners operating under franchise agreements.
  • Geographic Diversification: Hyatt’s properties are located in various regions across the world. The key regions are Americas, Asia Pacific, and EAME, with a presence in luxury hotels and resorts in these regions.

Hyatt’s strategic shift has seen management increasingly sell hotel real-estate to focus on fee-based earnings while still retaining management contracts. This transformation reduces the capital intensity of Hyatt’s business model, but also means the company has to increasingly grow its management and franchise business.

Revenue Drivers and Key Metrics

  • Management and Franchise Fees: Hyatt earns revenue through management fees, a percentage of hotel sales, incentives, license fees and other revenues. The major revenue contributor are hotels which are fully managed and franchised. These sources provide a recurring, high-margin revenue stream.
  • Owned and Leased Hotels Revenue: This revenue is less predictable, and closely tied to the occupancy, pricing, and mix of services offered. However, Hyatt is transitioning away from this model.
  • Comparable System-wide REVPAR: Revenue Per Available Room (RevPAR), is a metric of the combination of occupancy and average daily rates and a primary metric for measuring revenue trends in the hospitality business.
  • Adjusted EBITDA and Adjusted EBITDA Margins measure the profitability of Hyatt’s operations, before interest, taxes, depreciation, and amortization, with certain non-cash costs added back.
  • Net Package RevPAR: this metric applies specifically to the performance of luxury hotels and includes the addition of non room revenue generated by hotel guests.

Industry Trends and Competitive Landscape

  • The global hospitality industry is marked by intense competition from established brands and newer entrants like Airbnb and vacation rentals.
  • Economic cycles and consumer demand significantly impact hospitality trends.
  • Technology continues to disrupt the industry, with digital platforms and customer-centric technologies becoming increasingly important.
  • Consumer preferences for experiences and personalization of services are also driving the hotel industry
  • Brand Loyalty continues to remain a key driver for occupancy.
  • The rise of the independent hotels has been a noticeable trend, increasing competition.
  • The increasing emphasis on sustainability and reducing carbon emissions is being given a lot of attention.
  • The growth rate is expected to slow in the developed countries, but emerging countries will be crucial for growth.

Competitive Advantages & Moat Analysis Hyatt’s economic moat can be considered a narrow moat that is not very defensible, scoring a 2/5 on a moat rating:

  1. Brand Strength and Loyalty Programs: Hyatt’s brand name and loyalty program, World of Hyatt, are very prominent factors that draw customers.
  2. Location-based Advantages: Some of Hyatt’s hotels, especially resorts, have premium locations that are difficult to replicate, providing a mini-monopoly.
  3. Customer Switching Costs: In the luxury travel segment, there is high reliance on well-known names and trusted brands due to higher cost of switching. Thus this gives them some loyalty, which in return creates a moat for Hyatt.

However, there are many factors which erode the strength of the moat:

*   **High Competition:** The hospitality industry is very competitive, with many established brands and online travel companies vying for market share. This is a constant issue for all the companies in the industry.
*   **Brand Loyalty is Not Reliable:** As seen with the collapse of some huge retailers in the past, brand names are not as resilient as one would think. This can especially happen if Hyatt’s execution falters, therefore the moat is not as reliable.
*   **Economic Sensitivity:** The performance of Hyatt is closely linked to macro-economic conditions such as GDP, interest rates, and employment, making their earnings cyclical and hard to predict.

Financial Analysis

Hyatt’s financial health is relatively strong. They are making efforts to manage debt and increase shareholder value, therefore it scores a 4/5 on balance sheet health.

  • Revenues and profitability: Hyatt is shifting more toward their managment and franchising business. This business typically produces higher margin revenues, although the revenue itself might be lower. The overall results are as follows
    • Revenue for 2023 was $6.70 billion, up from $5.89 billion in 2022, mostly due to a change in the accounting standards
    • Diluted EPS was $3.15 in 2023, up from a loss of $1.56 in 2022, primarily driven by a large tax benefit and revenue increase.

While the company is seeing growth, it is important to keep in mind that much of the increase is due to new acquisitions, a change in the accounting standards, and a recovery from Covid. As things normalize in the future, the revenue growth can slowdown.

  • Cash Flow:
    • Operating cash flow for the year 2023 was $868 million, which was used to purchase around 5 million company shares for $442 million, giving a price per share of $88.4.
    • The cash balance at the end of December 2023 was $1.27 billion

The company has a tendency of spending a large portion of cash from operations into stock repurchases, rather than investments. This could become a negative if they start having operational issues, however this might give a higher return to shareholder.

  • Debt and Capital Structure:
    • Hyatt has a large amount of debt, total debt at the end of December 2023 was $3.35 billion, most of it being in senior notes. The interest payments are all fixed at various interest rates, which makes the debt less exposed to interest rate rises.

They are managing debt and repaying some of it over the years. Due to all the repayments and maturities, the debt is expected to be at low levels in the coming years. However, it should be monitored to see how much it drops from the recent high amount.

  • Shareholder returns:
    • Share buybacks show that the company is trying to deliver returns to shareholders.
      • In 2023, Hyatt bought back $442 million in company stock.
    • It also pays dividends, but has limited dividends compared to most other peers in the industry.

The company is more focused on share repurchases than dividends, which might make it less attractive to long term investors looking for consistent dividend yields.

Understandability: 3/5 Hyatt’s business model isn’t too difficult to grasp, however there are aspects that makes it fairly complex. You need to understand the different sources of revenue (management fees, franchise, company owned, etc.) and be able to analyze the operations in different parts of the world and their unique nuances, which makes the business require a fair amount of effort to understand its overall performance and trends, so it receives a 3/5 on the understandability scale.

Risks to Moat & Business Resilience

  • Economic Downturns: A significant decline in global economic activity can significantly reduce travel, impacting hotel occupancy, room rates, and ancillary revenue, which will hurt their earnings.
  • Increased Competition: As mentioned earlier, there is stiff competition in the industry which can hurt their ability to earn profits and can pressure pricing.
  • Geopolitical Instability and Pandemics: Events such as war, terrorism, and health crises like the COVID-19 pandemic, could severely disrupt travel and tourism and impact operations.
  • Technological Disruption: Rapid technological advancements and new entrants may undermine the appeal of traditional hotel and restaurant business models.
  • Increased Debt: A high level of debt might leave it unable to face some adversities if credit markets worsen or interest rates rise, and also increases exposure to interest rate risk.
  • Management decisions: As seen in the past, even the biggest brand names can fall if management falters and doesn’t recognize new trends.

The company has taken several initiatives to reduce their debt, and also their revenue and profits have recovered significantly from Covid, which has resulted in a more positive outlook. However, they will need to keep innovating and be ahead of the competition to maintain the lead. The management has also indicated that they will further expand their brand internationally and also the loyalty program.

In conclusion, Hyatt has several strengths such as strong brands and customer loyalty which help it attain a narrow moat in a highly competitive hospitality industry and is working to maintain and improve its financial performance, however it is exposed to a few important risks and is therefore not the strongest investment for a long term investor.