Hospitality Growth Soars With Nashville Expansion, Yet Profit Margin Pressures Loom

Key Takeaways

• Accelerated bookings and all-time high gross group ADR suggest strong future demand, driving revenue and margin growth in Ryman's hospitality segment.
  
• Strategic focus on Nashville and investment in high-return projects indicate potential for increased competitive advantage and improved net margins through enhanced service offerings.
  
• Risks from market softness, dependency on group business, significant capital investments, and new competition could impact revenue, occupancy, and net margins.

Catalysts

Ryman Hospitality Properties, Inc. (NYSE: RHP) is a leading lodging and hospitality real estate investment trust that specializes in upscale convention center resorts and entertainment experiences.

• The accelerated booking rate and all-time high gross group ADR for future years indicate strong future demand in Ryman's hospitality segment, likely to drive revenue and margin growth due to increased occupancy and room rates.
  
• The investment in high-return projects and enhancements, especially in the Gaylord Opryland and other properties, suggests potential for increased competitive advantage, higher guest spend outside the room, and overall improved net margins due to enhanced service offerings and guest experiences.
  
• The strategic focus on Nashville, fueled by the Music City Next plan and related expansions (e.g., new stadium, developments, and hotel rooms), points to long-term visitor growth and increased spending in the area, likely benefiting Ryman's hospitality and entertainment segments through higher demand and occupancy rates which positively impacts revenue.
  
• The refinancing activities reducing interest expenses and improvements in the balance sheet position the company for better financial health and liquidity, allowing for potential future investment and growth opportunities without diluting current shareholder value, likely aiding in EPS growth.
  
• The expansion and strong bookings in the Entertainment segment, including record revenue and the successful openings such as Ole Red Las Vegas, signal growth opportunities and diversified income streams, likely to contribute positively to overall company revenue growth and resilience against economic cycles in pure hospitality revenue.

Assumptions

• Analysts are assuming Ryman Hospitality Properties's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.2% today to 14.3% in 3 years time.
• Analysts expect earnings to reach $380.9 million (and earnings per share of $4.66) by about September 2027, up from $327.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.9x on those 2027 earnings, up from 20.0x today. This future PE is greater than the current PE for the US Hotel and Resort REITs industry at 20.0x.
• Analysts expect the number of shares outstanding to grow by 1.42% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.79%, as per the Simply Wall St company report.

Risks

• Leisure transient softness, especially in the Nashville and Orlando markets, could negatively affect room revenue and total RevPAR growth.
  
• Economic softness and its potential impact on the budget-conscious leisure consumer might delay recovery in this segment, affecting occupancy rates and revenue.
  
• Increased dependency on group business and out-of-room spending to mitigate transient softness introduces risk if there is any unexpected downturn in corporate profits or group booking trends, potentially impacting room and banquet revenue.
  
• Significant capital investments in property enhancements and expansions carry execution risk and depend on sustained demand to achieve expected returns, impacting net margins if growth projections are not met.
  
• Market-specific risks such as competition from new hotel rooms in Nashville could affect occupancy and ADR, despite strong current demand and visitation growth projections.

Valuation

• The analysts have a consensus price target of $123.67 for Ryman Hospitality Properties 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 $135.0, and the most bearish reporting a price target of just $105.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.7 billion, earnings will come to $380.9 million, and it would be trading on a PE ratio of 25.9x, assuming you use a discount rate of 8.8%.
• Given the current share price of $109.37, the analyst's price target of $123.67 is 11.6% higher.
• 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.