Share Buybacks And Global Expansion Will Improve Future Performance

Key Takeaways

• The $900 million share buyback is expected to enhance EPS by minimizing shares, benefiting future earnings growth.
  
• Acquiring Ruby Urban Lifestyle and expanding in key markets strengthens the brand portfolio and boosts long-term revenue growth.
  
• Economic fluctuations, competition, net system growth issues, rising interest costs, and sustainability challenges threaten revenue growth and profitability for InterContinental Hotels Group.

Catalysts

Owns, manages, franchises, and leases hotels in the Americas, Europe, Asia, the Middle East, Africa, and Greater China.

• The announcement of a new $900 million share buyback program for 2025 is expected to improve earnings per share by reducing the number of outstanding shares, thereby benefiting EPS growth.
  
• The acquisition of the Ruby Urban Lifestyle brand extends IHG's portfolio into the premium urban lifestyle segment, which is anticipated to generate additional fee revenue and enhance revenue growth by diversifying and strengthening the brand portfolio.
  
• Signings and openings in priority growth geographies such as the U.S., Greater China, Saudi Arabia, and India are set to boost system size and fee revenue, supporting a robust future revenue pipeline and longer-term revenue growth.
  
• The development and rollout of new technology systems, including the guest reservation and revenue management systems, are expected to optimize hotel performance and increase owner returns, likely supporting improved net margins through operational efficiencies.
  
• The expansion of ancillary fee streams through new loyalty point sales arrangements and co-branded credit card agreements is projected to deliver substantial additional fee revenue, fortifying revenue growth and potentially boosting overall earnings.

InterContinental Hotels Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming InterContinental Hotels Group's revenue will decrease by 17.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.8% today to 33.6% in 3 years time.
• Analysts expect earnings to reach $932.9 million (and earnings per share of $6.4) by about March 2028, up from $628.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $1.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.2x on those 2028 earnings, down from 27.6x today. This future PE is greater than the current PE for the US Hospitality industry at 14.9x.
• Analysts expect the number of shares outstanding to decline by 3.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.71%, as per the Simply Wall St company report.

InterContinental Hotels Group Future Earnings Per Share Growth

Risks

• Economic fluctuations and potential downturns in key markets like the U.S. could negatively impact RevPAR and occupancy rates, impacting overall revenue growth.
  
• The competitive landscape in the hotel industry, with the rise of alternative accommodation platforms like Airbnb, presents challenges to retaining market share and maintaining revenue streams.
  
• An elevated removal rate of hotels from the system could undermine net system growth targets and adversely affect future revenue and fee income.
  
• Rising interest costs and debt levels due to shareholder returns and acquisitions could pressure net margins and potentially reduce earnings if not offset by revenue growth.
  
• Environmental sustainability challenges and the inability to meet emission reduction targets might lead to increased regulatory costs or reputational damage, potentially impacting operational costs and net earnings.

Valuation

• The analysts have a consensus price target of £92.818 for InterContinental Hotels Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £110.62, and the most bearish reporting a price target of just £74.27.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.8 billion, earnings will come to $932.9 million, and it would be trading on a PE ratio of 23.2x, assuming you use a discount rate of 8.7%.
• Given the current share price of £85.56, the analyst price target of £92.82 is 7.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.