AI And Loyalty Expansion Will Drive Long-Term Fee Revenue And Earnings Stability

Catalysts

About Wyndham Hotels & Resorts

Wyndham Hotels & Resorts is a global hotel franchising company focused on economy and midscale lodging brands supported by a large international footprint and technology driven distribution and loyalty platforms.

What are the underlying business or industry changes driving this perspective?

• Although Wyndham is expanding its global pipeline with higher FeePAR brands and accelerating net unit growth in midscale and above segments, persistent softness in U.S. economy and midscale RevPAR and a slower return to the long term 2 to 3 percent RevPAR CAGR could cap fee related revenue growth and delay royalty rate expansion, which could translate into muted top line and EBITDA growth.
• While investments in AI powered direct booking tools and Wyndham Connect are improving direct contribution and ancillary upsell potential, slower franchisee adoption beyond the current small subset of hotels and rising technology spend could compress net margins if efficiency gains and incremental ancillary fees do not scale quickly enough to offset the cost base.
• Despite the large long duration opportunity from infrastructure and reshoring related travel, including data center and manufacturing projects, federal funding reallocations, project pauses and uneven regional demand may limit the expected uplift in midweek and project business, leading to lower than anticipated room nights and constraining revenue and earnings leverage.
• Although the fast growing loyalty ecosystem and credit card business as well as the new Wyndham Rewards Insider subscription aim to harness the expanding subscription and travel rewards economy, slower member uptake or lower than expected spend per member could result in ancillary fee growth moderating from mid teens toward more typical low single digit expansion, weighing on overall fee related revenue and EPS growth.
• While international markets, especially China and broader Asia Pacific, continue to drive outsized net room growth and pipeline additions, exposure to lower RevPAR regions, currency volatility and the use of development advances may dilute global FeePAR mix and pressure free cash flow conversion, which may limit upside to earnings and potentially constrain future capital returns.

Assumptions

This narrative explores a more pessimistic perspective on Wyndham Hotels & Resorts compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Wyndham Hotels & Resorts's revenue will grow by 4.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 23.5% today to 27.1% in 3 years time.
• The bearish analysts expect earnings to reach $438.0 million (and earnings per share of $5.53) by about December 2028, up from $338.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.8x on those 2028 earnings, down from 17.3x today. This future PE is lower than the current PE for the US Hospitality industry at 23.1x.
• The bearish analysts expect the number of shares outstanding to decline by 2.82% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.53%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Wyndham’s accelerating net unit growth, record 48,000 organic room openings year-to-date, 21 consecutive quarters of pipeline expansion and a pipeline that carries more than a 30 percent domestic and 25 percent international FeePAR premium could drive higher fee-related revenue, EBITDA growth and earnings than expected, supporting a higher share price over time.
• Rapid scale up of high margin ancillary revenue streams, including double digit growth in co-branded credit card accounts and spend, the launch of Wyndham Rewards Insider into a multi trillion dollar subscription economy and expanding sourcing programs could structurally lift non-RevPAR dependent revenue, net margins and long-term EPS above current expectations.
• Wyndham’s AI driven technology stack and Wyndham Connect platform, already reducing call handle times by 25 percent, improving direct contribution by nearly 300 basis points and still deployed at only 7 percent of hotels, may materially cut franchisee labor costs, shift mix away from OTAs and enhance upsell conversion, driving sustained expansion in EBITDA margins and free cash flow.
• Multiyear secular tailwinds from US infrastructure spending, private reshoring and data center development, with Wyndham hotels already outperforming local markets by 500 to 600 basis points in key data center regions, could translate into stronger midweek and project demand, lifting RevPAR, fee-related revenue and earnings above what a flat share price would imply.
• Continued international expansion, including double digit net room growth in China and strong growth in Europe, the Middle East and Asia Pacific, combined with disciplined use of development advances into higher FeePAR properties, may outweigh current RevPAR softness and currency headwinds, leading to higher global revenue, improved royalty rate mix and rising EPS that supports long-term share price appreciation.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Wyndham Hotels & Resorts is $71.0, which represents up to two standard deviations below the consensus price target of $93.56. This valuation is based on what can be assumed as the expectations of Wyndham Hotels & Resorts's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $115.0, and the most bearish reporting a price target of just $71.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $1.6 billion, earnings will come to $438.0 million, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 9.5%.
  
• Given the current share price of $77.53, the analyst price target of $71.0 is 9.2% lower. 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.