September 28, 2023

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Travel Groove

Hilton Stock: High Capacity To Accommodate Growth Prospects

Hilton Hotel in Melbourne, Australia

SunflowerEY/iStock Editorial via Getty Images

Companies in the hospitality industry were hurt by the pandemic disruptions. In the last two years, they had struggled to cope with the restrictions and changes in operations. Today, they are still yet to bounce back to their pre-pandemic levels. Even so, their comeback and recovery are more evident. Hilton Worldwide Holdings, Inc. (NYSE: HLT) is a giant that appears to regain its footing. Growth prospects are more enticing as the pent-up demand for travel and leisure peaks. Amidst inflationary pressures, its strong customer base and strategic pricing may help. It is no wonder that its fundamentals remain sound and intact. However, the stock price seems divorced and expensive.

Company Performance

Hilton Worldwide Holdings, Inc. owns and franchises a wide range of hospitality portfolios. From midscale and upscale hotels, it is popular for its chains of luxury hotels and timeshares. With over a century of existence, it has gone through changes in ownership and structures. But, it remains one of the largest multinational hospitality companies. Amidst the pandemic, it continues to prove its resilience as it regains its balance and expands.

Its operating revenue of $1.73 billion is a massive increase from $881 million in the previous year. The first month of the quarter appears to be sluggish due to seasonality. The Omicron fears and geopolitical tensions in Europe also hammer its performance. But in March, it sped up as the pent-up demand and easing of restrictions fired up corporate and leisure travels. Whether in solo, social group, or corporate events, the improvement is evident. Today, the increase in occupancy rates is driving its rebound.

Hilton Worldwide Operating Revenue

Operating Revenue (MarketWatch)

We can see that all its segments exceed the initial expectations. RevPAR is 80.5% higher than in the comparative time series. Again, it is due to the increase in occupancy rates and demand. Its fees, which comprise a large portion of revenues, have a 79% year-over-year growth. Of course, the figures are still lower than pre-pandemic levels. But, we can see that the gap continues to narrow down, showing its continued recovery. RevPAR is now over 80% of the 2019 value. It is way higher than the value in the last two years. Note that 1Q was faced with external pressures, such as Omicron and the war in Europe. Inflationary pressures are keenly felt now, which affects its costs and expenses. So the fact that it remains impeccable says a lot about its strong customer base and operational strategies. Indeed, its hotels and timeshares are accelerating from the 2020-2021 downturns. As such, the company has become increasingly optimistic.

Even better, costs and expenses remain manageable. It shows that expansion and efficient asset management continue to work together. It also benefits from its prudent hotel and resorts addition and closures. It figures out which properties benefit it most and in line with its growth roadmap. With its increased revenues and well-managed expenses, its profitability rises. The operating margin is 21% vs 3% in 1Q 2021.

Hilton Worldwide Operating Margin

Operating Margin (MarketWatch)

Relative to its peers, its 97% revenue growth is higher than most of its peers. These include Marriott (MAR) and Hyatt (H). It remains second on our list with 13% of the market share. It is a substantial increase from 10.4% in the comparative quarter. Its expansion amidst easing of restrictions and pent-up demand for travel is timely. Its operating margin appears to be better than many of them. It shows that its capital-light business model gives it an edge over its peers and external pressures.

Hilton Worldwide Market Share

Market Share (MarketWatch)

I like its fee-based and RevPAR premiums model. That makes its capital intensity range from low to moderate. If we check its revenues, it relies on franchising and licensing more than its owned and leased hotels. This model is also easier to manage as most upfront costs are shouldered by franchisees. Its revenue streams are more stable due to the franchise, royalty, and license fees it receives. Also, franchisees may know and secure an ideal area for the business. So, it does not have to spend more time and money on studying the location and doing feasibility studies.

I expect the positive momentum to continue amidst macroeconomic pressures. Note that the RevPar in April is already over 90% compared to 2019. With its strong market demand and operating capacity, its pricing strategy remains flexible. It may act as its natural inflation hedge to stay viable and liquid.

Why Hilton Worldwide Holdings, Inc. May Stay Afloat Amidst Inflation

Inflation worldwide has already surpassed our expectations. Initially, we thought it was going to be transitory. But now, it beats many record highs across different regions. In the US, the inflation rate hits 8.6%, the highest in the last four decades. That is why it affects the purchasing power of many consumers. Hilton Worldwide Holdings, Inc. is seeing the same trend as its operating costs may increase. Thankfully, its business model has lower capital intensity and definite revenue streams. The demand may be lower, but its flexible pricing strategy with its impressive fee-based model allows it to adjust its operations.

Amidst inflation, leisure travel may sustain its upsurge. As restrictions and fears ebb, it may operate at a larger capacity. We can see that it starts to maximize its capacity as leisure and corporate travels increase. A survey shows that 80% of Americans are looking forward to leisure traveling this summer. Over half of them feel that the US is on its way to normalcy. It is not at all surprising that the number of American travel plans is higher. The boom is also visible on the corporate side. It is already expected as Hilton saw an increase in occupancy for corporate gatherings in 1Q. The trend is also similar to the other regions. A recent survey conveys that business travel in the Americas and Asia-Pacific may increase by 41% and 35%. All regions are uptrend.

Projected Business Travel Spending

Projected Business Travel Spending Increase (hospitalitynet)

Its timeshare segment also sees enticing growth prospects this summer. In observation of RedWeek, timeshare rental bookings for this summer are up by over 200%. Likewise, timeshare sales appear to be on the way to the highest timeshare sales. There is a 43% in inquiries and offers on timeshare purchases.

As a response to these, HLT appears to be expanding. In fact, it already has 1.08 million rooms vs 1.03 in 1Q 2021 and 6,892 hotels vs 6,567 in 2021. Also, it recently approved over 20,000 new rooms for development. This year, it expects to sustain a 5% net unit growth from 2021. Its massive capacity allows it to capture more demand and cater to more guests.

Number of Hotels and Rooms

Number of Hotels and Rooms (1Q Financial Report)

But of course, it does not solely rely on market trends and estimates. Its financial position is strong, allowing it to cover its operations and expansion. Its operating cash flow is stable and adequate to cover both its CapEx and dividend payments. The changes in its working capital are a negative value, which is understandable. If we check the Balance Sheet, cash levels are lower. Receivables and PPE are way higher. Meanwhile, borrowings are lower by 12%. It also had its share repurchases, which added more shareholder value. With that, we can see that the company is both expanding and deleveraging. The values in the income statement show that its adjustments in operations are fruitful.

Hilton Worldwide Cash and Cash Equivalents and Borrowings

Cash and Cash Equivalents and Borrowings (MarketWatch)

Hilton Worldwide Cash Flow From Operations and CapEx

Cash Flow From Operations and CapEx (MarketWatch)

Stock Price Assessment

The stock price of Hilton Worldwide Holdings, Inc. remains in a downtrend. It has been sharper in the last two months. At $112.88, it has already been cut by 26% from the starting price. But, it appears that it is still not cheap yet. The price metrics convey potential overvaluation.

Hilton Worldwide - Hotel PE Ratio, P/CF Ratio, and EV/EBITDA

Hotel PE Ratio, P/CF Ratio, and EV/EBITDA (NASDAQ)

Meanwhile, dividend payments are well-covered, giving stable returns to investors. But, growth appears to be unexciting. With a dividend yield of 0.51%, it is way lower than the S&P 500. Despite its adequate capacity to sustain dividends, the relative cost appears to be high. So, we may assess the price better using the DCF Model, EV/EBITDA, and the Dividend Discount Model.

DCF Model

FCFF $1,689,000,000

Cash and Cash Equivalents $1,500,000,000

Borrowings $9,588,000,000

Perpetual Growth Rate 4.8%


Common Shares Outstanding $278,994,100

Stock Price $112.88

Derived Value $108.91


EV $40,730,000,000

Net Debt $8,090,000,000

Common Shares Outstanding 278,183,961

Stock Price $112.88

Derived Value $107.96

Dividend Discount Model

Stock Price $112.88

Average Dividend Growth 0.02976190476

Estimated Dividends Per Share $0.45

Cost of Capital Equity 0.0488848942

Derived Value $104.84

The three models adhere to the potential overvaluation. There may be a 4-8% downside in the next 12-24 months. Even if we adjust the shares based on the recent share repurchases, there may still be a 3-5% markdown.


Hilton Worldwide Holdings, Inc. shows sustained rebound and solid fundamentals. Its performance may boom further, given its promising growth prospects. Even so, the stock price is still not cheap yet and may decrease if the target 2Q values are not met. Investors must find a lower point before making a position. The recommendation, for now, is that Hilton Worldwide Holdings, Inc. is a hold.