Select Brand And Asset-Light Sale Will Shape Hospitality Despite Risks

Key Takeaways

• Hyatt's asset-light strategy is set to boost net margins by reducing capital and maintenance costs following real estate sales.
  
• Expansion of the Hyatt Select brand and a strong development pipeline in key markets signal significant potential for revenue growth.
  
• Shifts in booking behavior, economic volatility, and acquisition uncertainties may challenge revenue growth, profitability, and earnings expectations for Hyatt Hotels.

Catalysts

Operates as a hospitality company in the United States and internationally.

• The sale of Playa's real estate, alongside other owned properties, is anticipated to reduce Hyatt's ownership of hotels, which aligns with its asset-light strategy, potentially improving net margins by lowering capital expenditure and maintenance costs.
  
• The introduction and expected expansion of the Hyatt Select brand, aimed at upper mid-scale markets, indicates revenue growth potential through increased market penetration in secondary and tertiary markets within the U.S.
  
• The strong development pipeline, with approximately 138,000 rooms and several new signings in diverse locations like India, Italy, and the U.S., is likely to drive revenue growth as these new properties come online.
  
• The addition of over 2 million new World of Hyatt loyalty members, increasing the member base to approximately 56 million, indicates higher expected direct bookings, which can positively impact both revenue and net margins.
  
• Expectations of a strong performance in international markets and continued growth in all-inclusive portfolio bookings, particularly in the Americas, suggest positive future revenue growth compared to the U.S. market.

Hyatt Hotels Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hyatt Hotels's revenue will grow by 35.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 24.7% today to 5.8% in 3 years time.
• Analysts expect earnings to reach $462.9 million (and earnings per share of $5.56) by about May 2028, down from $794.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $525 million in earnings, and the most bearish expecting $380 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.5x on those 2028 earnings, up from 14.6x today. This future PE is greater than the current PE for the US Hospitality industry at 21.9x.
• Analysts expect the number of shares outstanding to decline by 5.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.4%, as per the Simply Wall St company report.

Hyatt Hotels Future Earnings Per Share Growth

Risks

• The shift in short-term leisure and business transient booking behavior, particularly in the U.S. markets, could impact future RevPAR growth and profitability, affecting overall revenue projections negatively.
  
• Slowing customer booking rates, especially in the upscale segment, suggest potential weaknesses in demand that could translate to lower-than-expected revenue streams in the near term.
  
• The uncertainty regarding the Playa acquisition, including needed antitrust clearances and achieving an 80% tender offer, may pose risks to the financial outcomes expected from the deal, potentially impacting future earnings from this investment.
  
• Economic volatility, including GDP contractions and disruptions in the fixed income markets, may affect consumer spending behavior and hotel financing conditions, leading to potential impacts on revenue and net margins.
  
• The high inflation rates in construction costs could potentially delay new hotel openings or impact the profitability and growth margins from newly developed properties, affecting long-term earnings expectations.

Valuation

• The analysts have a consensus price target of $142.962 for Hyatt Hotels 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 $198.0, and the most bearish reporting a price target of just $112.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.0 billion, earnings will come to $462.9 million, and it would be trading on a PE ratio of 31.5x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $121.56, the analyst price target of $142.96 is 15.0% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.