by Will Ashworth | July 26, 2013 10:34 am
A press release late last week from Hyatt Hotels (H) indicated that it was getting into the all-inclusive resort business. In partnership with Playa Hotels & Resorts, the Chicago-based hotel company looks to become a leader in this very popular segment of the lodging industry.
But with Hyatt’s stock trading within 5% of its 52-week high, should investors jump in, wait for a dip, or avoid it altogether?
Hyatt is investing $325 million in the partnership (20% ownership) whose main asset will be 13 resorts with 5,800 rooms in Mexico, Jamaica and the Dominican Republic. Of those 13 resorts, six will be rebranded as Hyatt all-inclusive resorts, beginning later in 2013 running through 2015.
In addition, the partnership also seeks to develop new all-inclusive resorts under the Hyatt brand in Latin America and the Caribbean. Considering the company had almost $800 million in cash on its balance sheet at the end of March, this is a very reasonable investment.
As Stephen Haggerty, Hyatt’s global head of real estate and capital strategy, said in its press release to announce its partnership, “The all-inclusive segment has grown rapidly over the past 20 years.” The fact that Hyatt’s getting into the game tells me this market’s about to get even swankier.
Interestingly, all-inclusive resorts are using an approach used by the cruise ship industry — where you pay one price for your vacation — and then when you get there and see how beautiful it is, they up-sell you on a nicer room, etc. It’s a business, after all. However, like cruise ships, all-inclusive resorts are popular because they provide bang for your buck. And now they’re going upscale, which is what has Hyatt excited.
Club Med North America CEO Xavier Mufraggi said in an interview in February that Club Med has done very well in North America and elsewhere because it has gone upscale. Approximately 70% of its customers are affluent families. This is the market that Hyatt wants to tap into. The simple fact is that upscale, all-inclusive resorts have higher operating margins than traditional hotels because they can control costs better as there’s less volatility in the bookings. Others like Hilton have rebranded several locations to the all-inclusive experience … and more will follow.
There’s no question the Playa investment is a smart one. However, it’s the entire business that I need to assess before I give it my blessing. And that’s where I have some reservations. Since going public in November 2009 at $25 per share, the stock has achieved a total return of 66%, 700 basis points less than the SPDR S&P 500 (SPY) and 1200 basis points less than Marriott International (MAR), one of its major competitors.
At the time of its IPO I had my doubts about the company’s upscale positioning; today, that’s clearly less of a concern. The problem that hasn’t gone away is its inability to generate cash — its operating margin is lower than all of its major competitors. However, it should be noted that the reason for Hyatt’s lower margins is that it owns most of its hotel properties — unlike its competitors–which are valued on the books at $4.1 billion. This puts a nice floor under the price of its stock.
The Pritzker family own 56% of the common stock and 75% of the voting power. It’s very much their company and they can run it as they see fit. As business people, they have a good reputation as does the Hyatt brand. Unfortunately, when it comes to its stock, its valuation is higher than most of its peers. The all-inclusive announcement could be the move that puts it back into growth mode but we won’t know for sure until well into 2015.
I just don’t see enough profitable growth in the next 6-12 months. If you’re thinking hotels, I’d check out Starwood (HOT) or Marriott instead.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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