Shares of some of the world’s best companies have been cut down amid the current crisis. Hilton Worldwide (NYSE:HLT) is no exception. Hilton stock has dropped a stunning 46% from its peak.
The fall is a classic case of the market weighing short-term fears too heavily. Of course Hilton is going to take a hit from the response to the coronavirus pandemic. But, again, its share price has been cut almost in half.
That type of decline isn’t justified by demand that is reduced for a few months. In fact, it’s not even justified by an impact that lasts a few years.
The impact won’t last a few years. This crisis will pass. The economy will recover. We will make it through. On the other side, consumers will want to travel and likely want to do so soon. (I’m surely not the only one with a strong case of ‘cabin fever’ at the moment.)
I’m not dismissing the very real human toll the coronavirus is taking. But the U.S. economy, and U.S. stocks, will come back stronger than ever. In the meantime, investors have the opportunity to own some of the world’s best businesses at a steep discount to fair value.
Hilton is one of those businesses. Hilton stock is one of those names priced at a discount.
It’s understandable why investors have sold Hilton stock. Panic still grips this market, even with a recent bounce. The volatility index, often referred to as the VIX, still sits above 50 — a hugely elevated level.
And like other hotels, Hilton is seeing a significant short-term reduction in demand. One industry analyst estimated that RevPAR (revenue per available room) was down a stunning 80% last week.
There are mid-term worries as well. Some investors clearly are worried that a recession will follow even once the coronavirus is under control. And Hilton unsurprisingly struggled during the financial crisis.
According to the prospectus filed at the time of its 2013 initial public offering, revenue declined almost 15% in 2009. Excluding non-cash impairments, operating profit fell by almost half.
Hilton is going to take a hit. But that’s true of most companies in the short term. There are exceptions like Zoom Video Technologies (NASDAQ:ZM), or a biotech like Moderna (NASDAQ:MRNA) that is working on a coronavirus vaccine. A travel-based company like Hilton, however, simply is going to have to make it through to the other side.
Look at History
And Hilton will make it through to the other side. Bear in mind that the company is a franchisor, which significantly minimizes its exposure to hotel-level operating losses during this pandemic.
Hilton did close 2019 with almost $8 billion in debt. But with a market capitalization still over $18 billion and the power of the Hilton brand, those liabilities are manageable.
Meanwhile, travel will bounce back. And corporate travel should do so first. That’s Hilton’s sweet spot.
We’ve seen what happens with hotel stocks in a recovery. Hilton was private during the financial crisis: Blackstone Group (NYSE:BX) led a leveraged buyout in 2007. But peers were among the best stocks to buy at — or even before — the March 2009 bottom.
The Case for Hilton Stock
I’m not guaranteeing that Hilton stock will see similar returns. But in a recovery, hotel stocks do well. And Hilton stock may well be the best hotel stock out there.
Certainly, in this volatile market, position sizing matters. Investors need to do their due diligence. And it’s possible HLT sees further declines.
But, as is always the case, investors need to take the long view. This is one of the world’s great companies. Its stock price is down by almost half.
At some point, one of those two things will change. It won’t be the quality of Hilton’s business.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.