Hilton Worldwide (HLT) reported quarterly earnings last week. The company beat on the top line, but fell short on the bottom line as expenses cut into earnings.
Moving forward, though, management is very optimistic about the business — enough to instill a quarterly dividend program. But, debt, a drop in EPS and costs rising for the hotel chain may keep Hilton stock suppressed.
So, is Hilton stock worth picking up after earnings? Let’s take a look at three pros and three cons of HLT to find out.
Hilton Stock Pros
Increasing Revenue: Revenue came in at $2.92 billion for the quarter — an increase from the $2.67 billion HLT reported for the same quarter last year. This figure also came right in line with analysts’ estimates. The increase in revenue came from a 5.2% bump in revenue per available room, a 17% jump in management and franchise fees and net unit growth rising by more than 11,000 rooms. All in all, HLT posted a solid quarter in all the areas a hotel investor would want to see growth.
New Dividend: Management announced it would now be paying a quarterly dividend of 7 cents per share, representing a 1% dividend yield at current prices. The first dividend will be paid on September 25, 2015 to shareholders of record by August 14, 2015.
Strong Future Guidance: For the full year 2015, management expects system-wide revenue per available room to increase by 5% to 7% on a comparable and currency-neutral basis. Franchise fees are projected to rise 11% to 13%. Corporate and other expenses are to remain flat, while full-year diluted earnings per share are expected to come in within a range of 80 cents to 84 cents per share.
Hilton Stock Cons
Increasing Costs: Total expenses for the quarter rose from $2.23 billion last year to $2.49 billion this quarter. For the first six months of the year Hilton has seen expenses increase by nearly $500 million. With higher revenue and especially an increase in revenue per available room, costs should not have risen as high as they did. Management needs to get this under control and should have kept a better eye on rising expenses before investors had to pay for management’s mistakes.
Declining EPS: Despite the higher revenues HLT report for the quarter, the higher costs cut into profits. Hilton reported just 16 cents per share earnings for the quarter, down from the 21 cents it reported a year ago and below analyst estimates.
Rising Debt: At the end of the quarter Hilton’s debt now sits at $10.4 billion. While that figure did sit at $10.8 billion at the start of 2015, $10 billion in debt is still quite a lot. But the really scary part about Hilton’s debt is that the vast majority of it due over the next six years. That debt could be a problem because interest rates will likely be much higher when that debt is due, which means Hilton may need to issue new debt.
Bottom Line for Hilton Stock
So, should you buy Hilton stock? No.
While it appears that Hilton’s business is performing well today and will continue to for the next few years, Hilton stocks valuation and other financials just don’t make sense, especially when compared to the other major hotel chains.
Hilton stock trades at 39 times earnings. Hyatt Hotels (H), the next most expensive hotel based on price-to-earnings trades at a P/E of 28. Hilton stock’s new dividend yield of 1% is also lower than any of the other major hotel companies: Marriott International (MAR) pays 1.4%, Starwood Hotels and Resorts (HOT) pays 1.8%, and Wyndam Worldwide (WYN) currently pays a 2% dividend yield.
Furthermore, HLT’s debt is also a concern when it comes to the long-term health of the dividend, especially if the company is forced to refinance.
Hilton is a good company and I believe it has the potential to be a good stock, but today investors should pass and go with another hotel stock, if they’re looking for something in the space.
As of this writing, Matt Thalman did not hold any positions in any company mentioned above. Follow him on Twitter at @mthalman5513.
