If you didn’t know there was a global pandemic and you read Hilton (NYSE:HLT) closed 1,000 hotels during the quarter leading to a 22-24% decline in revenue per available room (RevPAR), I’m confident you wouldn’t be considering buying Hilton stock.
However, we are in a global pandemic. Hilton’s first-quarter results could have been much, much worse. While the immediate future doesn’t look too bright, weary travelers will eventually return in droves to its 6,250 hotels around the world.
Believe it or not, despite the carnage, Hilton stock remains an excellent long-term play. Here’s why.
I Would Hate to Be Airbnb
InvestorPlace’s Laura Hoy recently discussed three ways the novel coronavirus will change the markets. One of the ways we’ll see change is that people won’t be nearly as eager to get on planes and sleep in germ-infested hotel beds. Citing the former head of the Food and Drug Administration, Scott Gottlieb, Hoy made it clear we’re not getting back to normal anytime soon.
And while it’s true that Hilton is going to suffer significantly from Covid-19, if one of the world’s largest hotel chains can’t bounce back, I doubt it really matters what happens to the markets; we’ll all be penniless and living in shanty huts.
First, before thinking about the bright side of the street, let’s look at some of the damage inflicted on Hilton in March:
- Operations have been suspended at 16% of its global hotels as of April 14, including 60% of those in Europe.
- The RevPAR in Asia fell 6% in January, 50% in February, and an estimated 74-76% in March.
- System-wide, RevPAR was up 1% in January, fell 4% in February, and was down an estimated 56-58% in March.
- At the moment, the hotel chain’s occupancy rates are 22% in China, 17% in the Americas and 13% for Europe, Middle East and Africa.
As bleak as this sounds, Marriott’s (NYSE:MAR) numbers are even worse.
It has approximately 25% of its 7,300 hotels closed at the moment. Its North American occupancy rate is 10% and RevPAR on a global basis fell 60% in March. Hilton, on a worldwide basis, has a closure rate that is 900 basis points less than Marriott. In the Americas, its occupancy rate is 700 basis points greater than Marriott, and its March RevPAR fell by approximately 200-400 basis points less.
So, it could always be worse. It could be Airbnb. If you think people are going to feel iffy about staying in hotel rooms, imagine staying in someone’s house in exotic places where it’s possible the properties have never been sterilized or kept clean.
“The hotel companies because they are so centralized, they can respond to these things … they can make sure the rooms are sanitized, to make people more comfortable. With [the coronavirus] the last thing I want to do is sleep in someone else’s bed,” said Dror Poleg, the co-chair of the Urban Land Institute’s Technology and Innovation Council.
He feels Airbnb was struggling before the coronavirus. Now, it’s only going to have a harder time bouncing back. I really have to wonder if it can do enough to stave off extinction.
At times like this, brand matters. Hilton’s got that in spades.
The Bottom Line on Hilton Stock
In times of crisis, investors look past the immediate dislocation, opting to consider what the likeliest scenario will be for those companies they’re considering investing. In the case of Hilton, there is no way it’s going out of business.
“We presently anticipate that, even if current levels of very low occupancy were to persist, this cash position, along with the net proceeds from the proposed offering of $500 million aggregate principal amount of senior unsecured notes [described in Item 7.01 of the SEC filing], will provide us with adequate liquidity to fund our operations over the next 18 to 24 months,” Hilton’s April 14 press release stated.
“Furthermore, the Company does not have any material indebtedness outstanding that matures prior to June 2024.”
The wise person considers how realistic it would be for occupancy rates to remain at current levels for more than 6-12 months. Sure, they might not get back to 70-80% where they’ve been for several years, but they won’t sit permanently at 17%, as is the case for Hilton in the Americas.
Investors make money betting on strong brands that execute well. Hilton is such a brand.
For those who bought in March at $56, you got an excellent deal. While it’s possible Hilton falls back below $60, I get the feeling you’ll do just fine in 3-5 years buying at $72.
Hilton stock is a long-term buy.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.