Louis Navellier’s #1 Stock for 2022

On October 20, the man who recommended Google before anyone else will reveal his #1 stock pick for 2022 — for FREE — ticker symbol and all — in a special presentation.

Wed, October 20 at 4:00PM ET

La Quinta IPO Is No Bueno For Wall Street

The La Quinta (LQ) IPO turned out to be far from easy. The company sold 38.3 million shares at $17 each, which was below the expected range of $18 to $21. And in today’s trading, the stock is up only 17 cents. All in all, it is a sign that the IPO market is starting to show some weakness.

La Quinta 185But let’s take a deeper look at La Quinta: Founded about 45 years ago, the company is now a top operator, owner and franchisor of select-service hotels, which serve midscale and upper-midscale segments. The typical hotel has fewer costly services and amenities, which helps to drive cash flows. There are usually no fancy business or banquet facilities.

Instead, the company has been investing in its technology. In 2012, La Quinta launched its mobile site and its new LQ Instant Hold feature, which allows guests to use their smartphone to hold a room for up to 4 hours — just by entering a phone number.

For the most part, La Quinta has been able to generate steady growth.  During the last decade, the company has increased the number of locations from 362 to 834. Currently, there are about 84,000 rooms, primarily located within 46 U.S. states.

But La Quinta could have fared much worse. Back in 2005, La Quinta went private in a $2.28 billion transaction that was sponsored by Blackstone (BX), the private equity powerhouse. The timing was far from ideal and the hotel operator would soon face major problems because of the financial crisis.

Yet senior management at La Quinta acted quickly. No doubt, there was the usual cost cutting as well as the unloading of lackluster properties. But La Quinta also looked for opportunities to grow, such as expanding into Canada and Mexico.

But perhaps the most important priority has been with franchising. This has allowed La Quinta to boost cash flows and ramp up the number of locations. For example, in 2013 the company generated adjusted EBITDA of $340.2 million on revenues of $909.1 million. And going forward, there should be further momentum from the strategy as the pipeline includes 187 franchised hotels.

For the most part, the fundamentals for the hotel market look healthy. According to a report from STR, the midscale and upper-midscale segments have posted average annual growth of 3.3% over the past three years. But during this period, the supply of new hotels has grown by a meager 0.1%.

Because of the demand-supply imbalance, La Quinta has been able to raise its prices and yes, pad its margins. During the first two months of this year, the revpar (revenue per available room) was up 6.6%. That compares to 5.4% for all of 2013.

So, why was the La Quinta IPO a dud? Well, part of the reason is that the IPO market has hit some headwinds lately.

If anything, there has been a flood of stock that has come onto the market from new offerings, and so there is probably some pushback from Wall Street. After all, this week 14 deals are planned to go public, with the expectation of raising up to $5 billion.

But this is certainly not the only factor that has impacted the La Quinita IPO.  Let’s face it, the overall performance for hotel stocks has been lackluster for this year:

Company Ticker Return
InterContinental Hotels IHG -3%
Wyndham Worldwide WYN -2%
Starwood Hotels & Resorts Worldwide HOT -1%
Hilton Worldwide HLT -3%
Extended Stay America STAY -13%
Choice Hotels International CHH -8%

But even with the falloff in La Quinta stock, the valuation is far from cheap. Consider that the price-to-earnings ratio is a hefty 47. That compares to multiples in the low 20s for companies like HOT, IHG and WYN.

And La Quinta could face some long-term pressures, as well. The emergence of Airbnb, which allows people to list their homes and apartments for rent, could be a real problem. As a sign of its potential disruption of the hotel industry, the company expects to book more rooms than HLT and IHG for 2014.

Even Warren Buffett is a fan of Airbnb. For the Berkshire Hathaway (BRK.B) annual shareholder meeting, he is recommending the service as an alternative, saying that traditional hotels are a rip-off!

Bottom line: There could easily be further weakness in La Quinta stock. And the weak IPO is a sign that Wall Street agrees.

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.

Article printed from InvestorPlace Media, https://investorplace.com/ipm_ipo_pb/la-quinta-ipo-2/.

©2021 InvestorPlace Media, LLC