Red Lion Hotels Corporation's (NYSE:RLH) Poor Growth Outlook Brings Concerns

Red Lion Hotels Corporation (NYSE:RLH) is a company I've been following for a while, and one that I believe the market is over-hyped about. The biggest risks I see are around the sustainability of its future growth, the opportunity cost of investing in the stock accounting for the returns I could have gotten in other peers, and its cash-to-debt management. It's crucial to understand if a company has a strong future based on its current operations and financial status.

First, a short introduction to the company is in order. Red Lion Hotels Corporation, a hospitality and leisure company, owns, manages, and franchises hotels under its Hotel RL, Red Lion Hotel, Red Lion Inn & Suites, GuestHouse, and Settle Inn & Suites brands primarily in the United States. Since starting in 1937 in United States, the company has now grown to a market cap of US$233.16M.

The first thing that struck me was the pessimistic outlook for RLH. A consensus of US hotels, restaurants and leisure analysts covering the stock indicates that its revenue level is expected to decline by -1.48% by 2020. As RLH is currently loss-making, this revenue headwind is expected to negatively impact its bottom-line, which should see a further decline from -US$2.04M to -US$1.04M.

Minimizing the downside is arguably more important than maximizing the upside. Generally the first check to meet is financial health - a strong indicator of an investment's risk. Two major red flags for RLH are its high level of debt at 0.6x equity, and its low level of cash generated from its core operating activities, covering a mere 6.72% of debt. Furthermore, its debt-to-equity ratio has also been increasing from 57.23% five years ago, and its EBIT was not able to sufficiently cover its interest payment, with a cover of below 1x. This does lower my conviction around the sustainability of the business going forward. RLH has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities. RLH has managed its cash well at a current level of US$36.18M. However, more than a fifth of its total assets are physical assets and inventory, which means that in the worst case scenario, such as a downturn or bankruptcy, a significant portion of assets will be hard to liquidate and redistribute back to investors.

RLH is now trading at US$10.20 per share. With 23.67 million shares, that's a US$233.16M market cap, which is in-line with its peers based on its industry and adjusted for its asset level. Currently, it's trading at a fair value, with a PB ratio of 1.54x vs. the industry average of 2.31x.

RLH is a fast-fail research for me. Good companies should have good financials to match, which isn't the case here. Given investors have limited time to analyze a universe of stocks, RLH doesn't make the cut for a deeper dive. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I've taken my data from.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.