Slower Growth Is the New Norm for Hilton Stock

Hilton's growth rates are slowing, but slow growth is enough to keep HLT stock on a near term uptrend

Shares of Hilton (NYSE:HLT) popped on Wednesday, Feb. 13, after the hotel operator reported better-than-expected fourth-quarter numbers alongside a healthy guide, which largely impressed investors. Hilton stock rose more than 5% in response.

In the big picture, Hilton’s fourth-quarter earnings report confirms that slow and stable is the new norm for this company. At one point in time, this was a big grower in a rapidly expanding accommodations industry. Then, the coordinated economy rushed to the forefront and coordinators like Airbnb stole market share from Hilton and other hotel operators. Ever since, Hilton has turned into a slow grower.

But Hilton has found stability in its new low-growth trajectory. And, as the old saying goes, slow and steady wins the race. That will be true for HLT shareholders. As growth continues to stabilize over the next several years, Hilton’s revenues and profits will gradually move higher — and Hilton stock will move higher too.

Thus, while I’m not usually a fan of chasing of rallies, buying into Hilton stock here isn’t such a bad idea. Upside to $90 looks achievable within the next 12 months.

The Airbnb Threat Is Real, But Not Apocalyptic

Earlier this decade, Hilton was a big-growth company. RevPAR, or revenue per available room, consistently grew north of 5% every year. Occupancy rates were marching several hundred basis points higher every year. ADRs, or average daily rates, were also growing by an impressive 3%-plus every year.

But, that was all before the rise of the coordinated economy and the mainstream emergence of Airbnb, which essentially democratized the supply of accommodations so that hotel operators like Hilton were no longer the only suppliers in the industry. The obvious takeaway here is that as Airbnb grew, Hilton struggled.

The numbers support this. Airbnb started gaining mainstream traction in 2015. At that point in time, Hilton’s growth rates started to slip. RevPAR growth slipped to 3% and lower. Occupancy rates started to stagnate. ADR growth dropped to below 3%. Ever since, Airbnb has only gained more traction, and Hilton’s growth rates have remained depressed relative to their pre-Airbnb.

As such, the Airbnb threat here is very real.

But, it’s not apocalyptic. Although RevPAR growth is slowing, it has remained above 1.5%, and is expected to remain above 1.5% again next year. Occupancy rates have continued to move gradually higher. ADRs are inching higher, too.

In other words, the Hilton growth trajectory has slowed because of Airbnb. But it’s also stabilizing at new low-growth rates. That’s a positive, because it shows that Airbnb and coordinated economy shifts won’t kill Hilton.

Hilton Stock Has Upside Potential In 2019

Slower is the new normal at Hilton, and slower but steady growth is enough to warrant further upside in Hilton stock in 2019.

Over the next several years, consistent flat to low-single-digit RevPAR growth plus low- to mid-single-digit unit growth should allow for roughly mid-single-digit revenue growth. During that stretch, profit margins should trend gradually higher thanks to steady RevPAR growth. Interest expense will go up because of higher rates. On the flip side, the share count will fall thanks to buybacks.

Overall, Hilton should be able to grow profits by a fairly steady 10% per year over the next several years. At that rate, I reasonably see 2025 earnings per share coming in around $7. The whole consumer discretionary sector normally trades around 20 forward earnings. Based on that average multiple, a reasonable 2024 price target for Hilton stock is $140. Discounted back by 9% per year (1 point off my normal 10% discount rate to account for the yield), that equates to a 2019 price target of roughly $90.

Thus, below $80, Hilton stock has healthy upside potential over the next twelve months.

Bottom Line on HLT Stock

The Airbnb threat to Hilton is very real, but it isn’t killing the company. Instead, it’s just diluting the growth trajectory, but Hilton is finding stability in this new low growth trajectory.

Thus, going forward, Hilton projects as a slow and steady grower. With respect to Hilton stock, slow and steady will be enough to power this stock to $90 in 2019.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 

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