Blackstone Is Selling Hilton Stock … Should You?

by Tom Taulli | June 11, 2014 4:22 pm

Blackstone Is Selling Hilton Stock … Should You?

According a recent filing, Blackstone[1] (BX[2]) plans to sell 103.5 million shares of Hilton Worldwide Holdings (HLT[3]). The transaction will reduce the overall equity stake from 76% to 66% of HLT outstanding stock. Of course, Wall Street’s reaction is far from enthused: Hilton stock fell 2.6% in Wednesday’s trading.

Hilton185 Blackstone Is Selling Hilton Stock ... Should You?It’s not unusual for a firm like BX to begin paring down its position. Blackstone took Hilton private 7 years ago, so it’s reasonable to harvest some returns in Hilton Stock.

And, yes, BX is more than just a passive investor, as the firm has a long history of streamlining corporate operations. As for the Hilton, BX brought in a new CEO, Christopher Nassetta, who was the former head of Host Hotels & Resorts (HST[4]). He wasted little time in restructuring the balance sheet and slashing expenses.

Other factors have helped improve the value of Hilton stock, including the Hilton Honors program, which has more than 40 million members, as well as the timeshare business, which has 314,000 members. These have helped improve repeat business and generate high-margin revenues.

But perhaps the most important move for HLT stock was a rethinking of the business model. For the most part, the new focus has been on franchising. That means Hilton doesn’t have to put up large amounts of capital when building out a location. Franchising also makes it is much easier to grow the global operations. Keep in mind that for the current pipeline — about 195,000 rooms — nearly all are under franchise agreements.

But there have also been some major industry trends that have provided a boost to Hilton stock. For example, the financial crisis has meant the overall capacity in the hotel industry has remained stagnant, which has helped keep prices firm. At the same time, there has been renewed growth in the U.S. economy, resulting in more demand from both business travelers and vacationers. In fact, Hilton’s latest earnings report indicated that revenue per available room, which is a key metric in the industry, will grow 5.5% to 7% for the year.

Despite all this, investors should still be wary of Hilton stock. Blackstone’s selloff is a red flag, especially because the firm is one of the world’s savviest investors. It has about $272 billion under management and has been making private equity deals since 1987. So if Blackstone expected HLT stock to go up, it probably wouldn’t be selling. The current sale is certainly a big chunk — and it won’t be the last. If anything, BX could be rushing to get its returns while markets are at record highs.

Besides, HLT stock is not cheap, with the forward price-to-earnings ratio at a steep 28. This is actually higher than a variety of online operator like Priceline.com (PCLN[5]), which has a multiple of 18, and Expedia (EXPE[6]), which is at 17.

Hilton stock is trading at a premium to many of its hotel peers:

Hotel Stocks PE Blackstone Is Selling Hilton Stock ... Should You?

All this isn’t to imply that HLT stock is going to plunge. It does look like the fundamentals for the hotel industry will remain strong. But going forward, HLT looks like it’s not the best stock to play the trend.

After all, that’s what BX seems to be saying with its recent sale.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. Blackstone: http://www.marketwatch.com/story/blackstone-to-sell-up-to-1035-million-hilton-shares-2014-06-11?dist=beforebell
  2. BX: /stock-quotes/BX-stock-quote/
  3. HLT: /stock-quotes/HLT-stock-quote/
  4. HST: /stock-quotes/HST-stock-quote/
  5. PCLN: /stock-quotes/PCLN-stock-quote/
  6. EXPE: /stock-quotes/EXPE-stock-quote/

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