Hilton Worldwide Holdings Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 2/5

Hilton Worldwide Holdings Inc. is a global hospitality company that manages, franchises, and leases a diverse portfolio of hotels and resorts.

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.

Hilton operates in the highly competitive hospitality industry. Although there are many well-known brands in this space, it is hard to make truly defensible competitive advantages, so they face strong competition from other large, global hotel chains, smaller independent hotels, and from alternative lodging options like short-term rentals (Airbnb, etc.).

Business Overview

Hilton’s operations are segmented into two main areas:

  • Owned and leased hotels: this segment includes hotels that Hilton directly owns or leases.
  • Managed and franchised hotels: this part of the business includes hotels that are either managed by Hilton for a fee or properties that operate under a Hilton brand through a franchise agreement.
  • The company has a global presence with a notable portion of its properties based in the US and the Americas.

#### Revenue Streams

  • Management and Franchise Fees: a substantial portion of their revenue comes from fees paid by property owners to use Hilton’s brands and management systems.
  • Owned and Leased Hotels Revenue: they directly generate revenue through room and other amenity sales from properties they own and lease.
  • Revenues are more heavily weighted to the Americas (U.S. and Latin America, etc.) as compared to other geographies like EMEA, and Asia pacific..

Industry Dynamics and Competitive Landscape

  • The hospitality industry is cyclical, influenced by macroeconomic factors, travel trends, and consumer spending habits. For example, economic downturns can sharply reduce the demand for both business and leisure travel, hurting the company’s profits.
  • The hospitality industry is highly competitive with a lot of players vying for the business: large global hotel chains like Marriott and Hyatt, smaller independent hotels and local chains, and alternative lodging options that have become extremely popular in recent years such as AirBnB and VRBO.
  • The strength of online travel agencies such as Expedia, Booking.com, and aggregators are growing with each passing year, and they are exerting a bigger leverage over hotel companies. As such, the power of OTAs is growing while the power of hotel companies is waning.

Competitve Advantage (Moat) Analysis

Based on this analysis, HLT’s moat is rated a 3 out of 5. It has several attributes that lend it a narrow moat but not a wide moat.

  • Brand Recognition: Hilton has a portfolio of well-recognized brands—including Hilton, Waldorf Astoria, Conrad, Embassy Suites, DoubleTree, Hampton Inn, and others—which are very well known to the public, and allows them to attract more customers. The strength of the brand allows them to charge higher prices, and ensures customer loyalty for certain segments. However, the brand does not have enough pricing power or customer loyalty to guarantee their long term success.
  • According to Interbrand rankings, the global best 25 brands only gave Hilton a mid 20% rating, meaning that brands do not create strong economic moats on their own.
  • Network: As Hilton has so many locations worldwide, it increases the likelihood that the customer will have access to their chain, compared to others. The bigger the brand’s network, the greater it’s chances to generate revenue due to customer convenience.
  • Scale: The company has operations that are heavily integrated, from management, to franchising, to development. All the different functions benefit from the size of operations of the company which makes it a barrier to entry for smaller companies to match the cost structures of Hilton.

Risks and Resilience

  • Economic Sensitivity: Hilton’s performance is highly correlated with the global economy. Recessions or economic slowdowns can drastically reduce travel demand, leading to lower occupancy rates and prices.

  • The management mentioned in their latest earnings call that though the recovery of the travel demand has been strong, their customers are sensitive to pricing and promotions, which is more common in volatile times.

  • Competition: Intense competition from traditional and alternative lodging options can erode Hilton’s market share and profitability.

  • The rise of short term rentals is causing a shift in the industry’s dynamics and could permanently lower the barriers of entry in the industry, while also increasing their supply.

  • Capital Expenditures: Companies involved in property businesses typically have to incur more costs to stay in the business because of maintenance and rehauling of their facilities, which negatively impacts their free cash flow, and ability to compete.

  • Debt Burden: As seen in the latest reports, the company is relying heavily on debt and if the cost of debt increases it could materially impact the business.

  • In the most recent 10K, their debt to total capital ratio was 75%, which is very high and could prove risky for the company.
  • Brand Management: If Hilton’s brands become dated, or if the company fails to maintain quality and consistency, the brand advantage could be compromised. This is particularly important given the reliance on brand value in the hospitality business.

Financial Analysis

  • Revenue Growth: They are growing their revenues steadily and their management is confident that revenue will continue to grow through acquisitions, more locations, higher pricing, and more. They reported that their RevPAR increased by 27% year-over-year, while also stating that it was driven by growth in ADR (Average Daily Rate), though that would moderate, going forward. They also expect double-digit RevPAR growth to continue for another year.
  • Despite the growth in revenues, the occupancy rates have not yet recovered to pre-pandemic levels, giving them further potential for growth.
  • Profitability: Even though their revenues are growing, their net margins are rather slim, which does not suggest a very healthy core business. The company reported net margins of about 4% for 2021, and while the margins have improved since then they are still very much susceptible to economic forces.
  • The management has focused and achieved improving operating income margins over the past couple of quarters, and expects that trend to continue, especially as they focus on their ‘core’ business.
  • Cash Flows: The free cash flow has been consistently positive, and with that they have been investing it into acquisitions and buying back shares. This puts the company in a strong position to withstand difficult times, while also allowing them to take advantage of opportunities to increase their profitability.
  • Debt: The latest numbers suggest that the company’s debt position has increased substantially after the pandemic. In addition, most of their debt maturities are coming in a few years, creating an extra element of risk that if they are not able to pay it back they may face consequences.
  • Debt to asset ratio is very high, at over 70%, which is alarming, if not managed prudently, could mean bankruptcy in worse situations.
  • Share Repurchases: The company has consistently engaged in share buyback programs, which if done correctly can create shareholder value.
  • But, share repurchase may not create value for the current shareholders if the company is overvalued, which leads to it essentially overpaying for their shares.

Understandability: 2 / 5

The hotel business model itself isn’t complicated. However, Hilton’s multi-pronged approach across various ownership structures, brand recognition efforts, and their complex accounting methods, and financial metrics makes it difficult to analyze for the average investor.

Balance Sheet Health: 2 / 5

The company’s balance sheet is not in very good shape due to its heavy reliance on debt. The Debt to asset ratio is over 70% and if not managed prudently it will put the company in a risky situation.

Recent Controversies and Problems

  • The company is going to reduce or has reduced their non-core businesses like time shares, given low profitability and growth.
  • They have a plan to aggressively expand their hotel chain to international markets, mainly in Asia Pacific and EMEA.
  • They want to increase the value for their shareholders by increasing their free cash flow, which will allow them to buyback more shares or pay more dividends to the stakeholders, while also increasing overall earnings and profits.
  • The management is confident that while there might be a slowdown in the general economic conditions, it won’t hurt their operations and future outlook, since travel has not fully recovered to pre-pandemic levels, and hence they see an overall recovery as positive for them.

Conclusion

Hilton, while a strong player in the industry, still needs to tackle certain issues for it to be a good investment. While the management is extremely confident in the future prospects, they have to address some issues like improving margins, and cutting down on costs, for the company to do well. Overall, there are better options available, unless the price is too much below their intrinsic value.