uploads///Part_Valuation

Hilton’s stock price and valuation compared to its peers

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Oct. 3 2014, Published 8:35 a.m. ET

Initial public offering in 2013

Hilton offered 117.6 million shares—at $20 per share—under its initial public offering (or IPO) on December 11, 2013. It started trading publicly. It was listed on the NYSE under the symbol “HLT.” The net proceeds from the IPO were going to be used to repay $1.25 billion of term loan under its senior secured credit facilities.

The stock price increased by ~15% to $24.7 on September 23, 2014—from $21.5. Currently, Hilton has no plans to pay dividend. During the period, the stock underperformed the S&P 500 Index and the S&P Hotels, Resorts, & Cruise Lines Index.

Part16_Valuation

Valuation

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Hilton’s (HLT) forward enterprise value (or EV) to earnings before interest, taxes, depreciation, and amortization (or EBITDA) multiple is 13.23x. It’s higher than most of its peers. The stock commands a premium valuation for its industry-leading position. It has the highest supply pipeline in the industry. Its market share of rooms under construction is four times higher than the current market share. Hilton’s forward EBITDA margin is 24.4%—the highest among its peers.

Now let’s look at the valuation of its peers. Wyndham (WYN) is placed better than Hilton in terms of valuation. It has the same level of leverage as Hilton’s, but its shares are trading at a ~17% discount to Hilton’s shares—going by the forward EV to EBITDA multiple and forward margin estimates. Marriott (MAR) is overvalued at 14.26x EV to EBITDA—the highest among its peers—for the lowest margin forecast of 11.3%. Although, Starwood (or HOT) and Hyatt (H) have lower multiples, their forecasted margins are lower than Hilton’s.

Investors who invest in individual stocks in a specific sector are exposed to greater risk in the stock or industry. Investing through and exchange-traded fund (or ETF) carries less risk. Some of the ETFs that have a holding in hotel and lodging stocks include the PowerShares Dynamic Leisure and Entertainment Portfolio (or PEJ), the First Trust U.S. IPO Index Fund (or FPX), and the Consumer Discretionary Select Sector SPDR Fund (XLY).

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