Trade of the Day: Hilton (HLT)

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Hilton Worldwide Holdings (HLT) recently matched Wall Street’s estimates for earnings of $0.23 a share, while revenue of $2.9 billion came in higher than forecasts for $2.87 billion.

Looking ahead, Hilton said it sees current-quarter earnings of $0.21-$0.23 a share versus estimates for $0.22 a share. For 2015, Hilton forecast earnings of $0.81-$0.83 a share against analyst estimates for $0.82 a share.

Hilton didn’t give any hard numbers for next year, but the company said that revenue per available room, or RevPAR, would increase 4%-6%. RevPAR is a fancy term that calculates revenue by the total number of rooms and the number of days within the time period.

Hilton is a premium name, and it is expanding its pipeline, as its global system of rooms is expected to expand by between 45,000 and 50,000 on an overall basis.

M&A speculation is heating up in the hotel/lodging sector, and I think Starwood Hotels (HOT) is the most attractive name at the moment. Current rumors have Hyatt (H) in advanced talks to acquire Starwood. However, in late October, The Wall Street Journal reported that there were three possible Chinese suitors interested in Starwood Hotels.

If Hyatt is the lead candidate to acquire Starwood, the other Chinese bidders could seek an alternative, and Hilton would make perfect sense. Earlier this year, it was rumored that Chinese investors approached Blackstone (BX) about its controlling stake in Hilton and offered up to $45 a share.

Another reason I like Hilton is that there is the possibility of a Hilton REIT (Real Estate Investment Trust) spinoff. The company is committed to returning cash to its shareholders and recently announced a $0.07 quarterly dividend. While the current dividend makes for a paltry 1% yield, a tax-free spinoff of Hilton’s company-owned properties could add another $3-$4 in share value.

A REIT spinoff is only speculation as well, but it would be part of a trend that has been developing recently. MGM Resorts recently announced plans to convert to a REIT structure.

To be clear, this trade is based solely on technical and fundamental analysis, but I do like the takeover chatter within the industry. Here’s the best way to play it:

Buy the HLT December 27 calls (HLT151218C00027000) at current levels around $0.40.

I do not have a stop loss in place, but my exit target for these calls is $1.00, which would better than double traders’ money.

Hilton shares tested $25.90 Wednesday before fading. Support is at $25, followed by $24.50 and the 50-day moving average. Near-term resistance is at $26.

Hilton

The 200-day moving average north of $27 is also flattening out, and that is a level I expect shares to clear by the end of the year. If Hilton shares test $28 by Dec. 20, these options will easily double from current levels.

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