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Hyatt's 1Q17 Earnings Preview: What Can You Expect?

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Part 7
Hyatt's 1Q17 Earnings Preview: What Can You Expect? PART 7 OF 8

Chart in Focus: Assessing Hyatt’s Debt Level

Increasing debt

Hyatt’s (H) rival Marriott International (MAR) has grown mainly through some big acquisitions since 2009. On the other hand, Hilton (HLT) preferred the organic growth route. Hyatt has taken the middle road.

Although Hyatt’s debt is not as high as Marriott’s, it is not as low as Hilton’s. Total debt on Hyatt’s balance sheet increased from $1.4 billion at the end of 2015 to $1.6 billion at the end of 2016.

Chart in Focus: Assessing Hyatt&#8217;s Debt Level

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Net debt-to-EBITDA ratio

Declining EBITDA1 levels and increasing debt have wreaked havoc on Hyatt’s leverage ratios. However, improving cash flows have provided some respite. The company’s cash balance increased from $503 million at the end of 2015 to $647 million at the end of 2016

Hyatt’s net debt-to-EBITDA ratio was 5.6x at the end of 2014, and it fell to 5.4x at the end of 2015. Hyatt’s net debt-to-EBITDA ratio rose to 6.1x at the end of 2016.

Why is increasing leverage risky?

Growth prospects in the hotel industry seem to be getting dimmer. Also, the strong US dollar, uncertainties in the Eurozone and other economies, and unstable oil prices could subdue Hyatt’s growth.

The hotel sector is capital intensive and normally has high debt. High debt affects the valuation multiple, as debt is an important factor for investors. Reducing total debt helps Hyatt decrease its interest expenses and achieve better investment ratings, which could lower its interest rates. In our view, investors should pay close attention to Hyatt’s increasing leverage.

In the next article, we’ll discuss the possibility of Hyatt paying dividends in 2017. Hilton and its peers as Marriott (MAR), Wyndham (WYN), and Starwood (HOT) are part of several exchange-traded funds. These funds include the PowerShares Dynamic Leisure and Entertainment Portfolio ETF (PEJ) and the Consumer Discretionary Select Sector SPDR ETF (XLY). ETFs provide investors with an opportunity to diversify their company-specific risks.

  1. earnings before interest, tax, depreciation, and amortization
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