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Hyatt's 2Q17 Earnings Preview: What Can We Expect?

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Part 5
Hyatt's 2Q17 Earnings Preview: What Can We Expect? PART 5 OF 7

What You Should Know About Hyatt’s Leverage Ratio

Increasing debt

Hyatt’s growth has been partly organic and partly inorganic. The inorganic growth has been supported by debt. Hyatt’s current debt is similar to that seen in 2014, at $1.4 billion. It fell to $1.0 billion at the end of 2015. Prior to 2014, its debt was even lower, at $1.3 billion in 2013 and $1.2 billion in 2012.

What You Should Know About Hyatt&#8217;s Leverage Ratio

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Hyatt’s absolute debt is higher than Hilton Worldwide Holdings’ (HLT) but lower than Marriott International’s (MAR).

Leverage ratio

Falling EBITDA (earnings before interest, tax, depreciation, and amortization) and increasing debt have led to a higher leverage ratio for Hyatt. Its net-debt-to-EBITDA ratio fell from 5.8x at the end of 2014 to 5.4x at the end of 2015, and then rose to 6.1x at the end of 2016. At the end of the first quarter of 2017, its leverage ratio rose further to 6.5x.

Recently, the company has used its cash balance to pay for acquisitions. In the first quarter, Hyatt added Miraval Resort, Travaasa Resort, and Cranwell Resort to its portfolio. The company’s cash balance fell from $647 million at the end of 2016 to $426 million at the end of 1Q17.

Peer comparison

On the leverage front, Hyatt is faring far better than peers. Wyndham Worldwide (WYN) has the highest leverage ratio in the peer group, at 19.6x. Hilton has a leverage ratio of 15.5x, and Marriott International has a leverage ratio of 11.8x.

Why is increasing leverage risky?

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

Investors can gain exposure to the hotel sector and by investing in the First Trust Consumer Discretionary AlphaDEX ETF (FXD), which has a ~15% exposure to the hotel, restaurant, and leisure sector, including a 1.1% exposure to Wyndham Worldwide, a 0.55% exposure to Hyatt (H), a 0.9% exposure to Hilton (HLT), and a 1.2% exposure to Marriott (MAR).

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