This week, we use AAII’s A+ Investor Stock Grades to provide insight into three hotel stocks. With summer just around the corner and travel returning to normal, should you consider these three hotel stocks of Hilton Worldwide Holdings Inc. (HLT), Marriott International, Inc. (MAR) and Wyndham Hotels & Resorts, Inc. (WH)?
Hotel Stocks Recent News
The hotel industry was one of the hardest-hit industries during the coronavirus pandemic. Many U.S. hotels closed, especially luxury hotels. At the height of the pandemic, occupancy was less than 15% for luxury hotels and around 40% industrywide. More than 670,000 hotel industry operation jobs and nearly four million hospitality jobs were lost in 2020. There remain strong headwinds and potential disruptors to a full recovery. While leisure travel will likely return fully in 2022, business travel is projected to remain significantly below pre-pandemic levels.
As leisure demand continues its trajectory toward pre-pandemic levels, hotels face a challenge that has afflicted companies with customer-facing service roles across industries: hiring enough people. As of October 2021, there were 300,000 fewer workers in the hotel industry than in 2019. Despite this, there is high demand for workers. Hotels are struggling to attain the staffing levels required to meet the rebounding travel demand due to a shortage in the supply of workers and rising labor inflation. To combat rising wages, many accommodation providers have shifted housekeeping to a by-request-only model and cut back on food and beverage amenities including room service and restaurants.
Working remotely has become commonplace for many employees and is anticipated to become more than just a passing trend. An unprecedented number of high-profile companies have announced that they will adopt a hybrid or flexible approach to working remotely, with big tech companies like Twitter (TWTR), Facebook (FB) and Amazon (AMZN) leading the way. This means that hospitality venues are being used as makeshift offices for business-leisure travelers as well as by locals seeking a change of work environment. This is a great opportunity for hotels to capitalize on the trend and adapt their offerings to meet the needs and wants of this emerging segment.
Throughout 2022, the hotel industry will still face pandemic-related challenges and heightened responsibility to ensure the safety of travelers and workers. Rising inflation and fuel costs for airlines are among the leading travel concerns as the year progresses. But travel’s recovery is strengthening and opportunities to encourage continued growth are emerging. To remain competitive, hotels must recognize and plan for a decrease in business travel. Catering to the new remote work environment by providing better amenities for business-leisure travelers could prove to be a great opportunity for hotels to grow post-pandemic.
Grading Hotel Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is one reason why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been shown to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three hotel stocks-Hilton, Marriott and Wyndham-based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Hotel Stocks
What the A+ Stock Grades Reveal
Hilton Worldwide Holdings Inc. is a hospitality company. The company is engaged in managing, franchising, owning and leasing hotels and resorts and licensing its brands and intellectual property. The company manages, franchises, owns or leases approximately 6,832 properties comprising approximately 1,073,239 rooms in over 122 countries and territories. Its brands include Waldorf Astoria Hotels & Resorts, LXR Hotels & Resorts and Conrad Hotels & Resorts, Canopy by Hilton and others. It operates through two segments: management and franchise, and ownership. The management and franchise segment includes all the hotels, which the company manages for third-party owners, as well as all franchised hotels operated or managed by someone other than the company. The management and franchise segment includes approximately 740 managed hotels and over 6,038 franchised hotels consisting of approximately 1,055,088 rooms. The ownership segment includes approximately 54 properties totaling over 18,151 rooms.
Hilton has an A+ Growth Grade of B. The growth grade considers both the near- and longer-term historical growth in revenue, earnings per share, and operating cash flow. The company reported fourth-quarter 2021 revenues of $1.84 billion, up nearly 107% from $890 million in the year-ago quarter. The company’s quarterly diluted earnings per share were $0.52, up from a loss of $0.81 per share year over year. Operating cash flows were $131 million, up from a loss of $138 million in the prior-year quarter.
Hilton has a Momentum Grade of A, based on its Momentum Score of 86. This means that it ranks in the top tier of all stocks in terms of its weighted relative strength over the last four quarters. This score is derived from a high relative price strength of 16.9% in the most recent quarter and 7.3% in the third-most-recent quarter, offset by low relative price strengths of 2.9% and -5.4% two and four quarters ago, respectively. The scores are 83, 74, 78 and 57 sequentially from the most recent quarter. The weighted four-quarter relative price strength is 7.7%, which translates to a score of 86. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weighting of 20%.
The company has a Value Grade of F, based on its Value Score of 95, which is considered to be ultra-expensive. This is derived from a very high price-earnings (P/E) ratio of 106.9 and a price-to-free-cash-flow (P/FCF) ratio of 608.4, which ranks in the 100th percentile. Hilton has a Quality Grade of B led by a strong change in total liabilities to assets of -12.8% and return on invested capital (ROIC) of 46.3%.
Marriott International, Inc. is an operator, franchisor and licensor of hotel, residential and timeshare properties. It operates in two business segments: U.S. & Canada and international. Its classic luxury hotel brands include JW Marriott, the Ritz-Carlton and St. Regis. Its distinctive luxury hotel brands include W Hotels, the Luxury Collection, Edition and Bulgari. Its classic premium hotel brands include Marriott Hotels, Sheraton, Delta Hotels, Marriott Executive Apartments and Marriott Vacation Club. Its distinctive premium hotel brands include Westin, Renaissance, Le Meridien, Autograph Collection, Gaylord Hotels, Tribute Portfolio and Design Hotels. Its classic select hotel brands include Courtyard, Residence Inn, Fairfield by Marriott, SpringHill Suites, Four Points, TownePlace Suites and Protea Hotels. Its distinctive select hotel brands include Aloft, AC Hotels, Element and Moxy.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
Marriott has a Quality Grade of B with a score of 72. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital, gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a Quality Score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
The company ranks strongly in terms of its return on assets and F-Score. Marriott has a return on assets of 4.4% and an F-Score of 8. The return on assets indicates how profitable a company is in relation to total assets. The higher the return on assets, the more efficient and productive a company is at managing its balance sheet to generate profits. The F-Score is a number between zero and nine that assesses the strength of a company’s financial position. It considers the profitability, leverage, liquidity and operating efficiency of a company. However, Marriott ranks poorly in terms of its gross income to assets, in the 29th percentile.
The company has a very strong Momentum Grade of A with a score of 87, driven by strong relative price strength in three of the last four quarters. The weighted four-quarter relative price strength is 8.3%, which translates to a score of 87. Marriott has an average Growth Score of 55, with a quarterly earnings growth score of 96, largely offset by a score of 18 for the five-year sales growth rate.
Wyndham Hotels & Resorts, Inc. is a hotel franchising company. The company operates through two segments: hotel franchising and hotel management. The hotel franchising segment licenses its lodging brands and provides related services to third-party hotel owners and others. The hotel management segment provides hotel management services for full-service and limited-service hotels as well as two hotels that are owned by the company. The company manages properties under its brands, primarily under the Wyndham, Wyndham Grand, Wyndham Garden, Wingate, TRYP, Travelodge, Trademark, Super 8, Ramada, Microtel, La Quinta, Howard Johnson, Hawthorn Suites, Esplendor, Dolce, Dazzler, Days Inn, Baymont and AmericInn brands. The company operates as a hotel franchiser and licenses 22 hotel brands with approximately 9,000 affiliated hotels with 813,300 rooms in over 95 countries.
The company has a Value Grade of D, based on its Value Score of 70, which is considered to be expensive.
Wyndham’s Value Score ranking is based on several traditional valuation metrics. The company has a score of 24 for shareholder yield, 64 for the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA) and 58 for the price-to-free-cash-flow ratio (remember, the lower the score the better for value). The company has a shareholder yield of 2.4%, an EV/EBITDA ratio of 15.6 and a 23.1 price-to-free-cash-flow ratio. A lower price-to-free-cash-flow ratio is considered better, and Wyndham’s price-to-free-cash-flow ratio is above the sector median of 15.7. Wyndham’s shareholder yield is the only valuation metric for the company that is better than the industry average.
The Value Grade is the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above along with the price-to-book-value ratio, price-to-sales ratio and price-earnings ratio.
Earnings estimate revisions offer an indication of how analysts are viewing the short-term prospects of a firm. Wyndham has an Earnings Estimate Revisions Grade of B, which is considered positive. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
Wyndham reported a positive earnings surprise for first-quarter 2022 of 47.5%, and in the prior quarter reported a positive earnings surprise of 28.5%. Over the last month, the consensus earnings estimate for the first quarter of 2022 has increased from $2.005 to $2.071 per share due to six upward and three downward revisions. Over the last three months, the consensus earnings estimate has decreased 2.1%, from $0.952 per share based on two upward and four downward revisions.
Wyndham has a Quality Grade of A, based on its Quality Score of 97, which is considered very strong. This is based on a high F-Score of 9 and a change in total liabilities to assets score of 89. The company has a very strong Momentum Grade of A, with a score of 85. The company currently has a dividend yield of 1.5% which is in the 77th percentile of all stocks.
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.