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Bill Ackman Loves Hilton Stock (NYSE:HLT). Should You?
Stock Analysis & Ideas

Bill Ackman Loves Hilton Stock (NYSE:HLT). Should You?

Story Highlights

Bill Ackman’s strong love for Hilton highlights the company’s asset-light business model and high-margin cash flows that set it apart in the lodging industry. Hilton’s impressive recent performance and strong unit growth outlook reinforce its standing as a compelling long-term investment.

Bill Ackman has a strong love for Hilton Worldwide Holdings (NYSE:HLT) stock, which makes up over 12.5% of his seven-stock portfolio. Under the renowned guidance of Bill Ackman, Pershing Square’s portfolio garners considerable market attention, a testament to his legendary reputation. The inclusion of Hilton in this select group underscores the business’s exceptional quality. With Hilton enjoying a lean business model and industry tailwinds, I am also bullish on the stock.

Why Does Bill Ackman Love Hilton Stock?

Bill Ackman has expressed his love for Hilton stock multiple times throughout interviews and TV appearances. As he highlights in Pershing Square’s periodic reporting, there are multiple reasons to like the lodging giant. The most notable reason is that Hilton is a high-quality business with an asset-light business model.

In contrast to the conventional business model prevalent in the lodging industry, where companies typically own the properties they rent, Hilton strategically takes advantage of the power of its world-renowned brand to engage in intellectual property licensing. This innovative approach allows Hilton to generate substantial management and franchise fees, characterized by high-margin cash flows.

To illustrate, among the 7,295 properties operating under its various brands, a substantial 6,380, equivalent to 87%, operate under franchise agreements. Consequently, the company’s Q2 financial results underscore that a mere 14% of its total revenues originate from properties owned by Hilton itself. The lion’s share of its revenue stream comprises licensing, management, and other brand-related fees.

Importantly, Hilton’s distinctive position stems from the fact that its franchised properties are externally managed. Thus, the company maintains no involvement in day-to-day operations and the associated operating expenses. As a result, its revenues are high-margin, as they require “minimal effort” on Hilton’s part.

This distinguishes Hilton from industry competitors, who are vulnerable to various external influences like labor market shifts, inflation, and industry trends. Impressively, in Q2, Hilton’s EBITDA margin stood at a sky-high 69.3%.

Hence, you can see why Bill Ackman loves this business. With Hilton’s brands set to remain relevant “forever,” the legendary investor sees this as a cash cow to hold for the ages. Notably, his publicly-traded fund Pershing Square owns about 3.3% of Hilton’s outstanding shares, with its long position being in place since Q4 of 2018.

How is Hilton’s Performance Faring Lately?

During the first half of 2023, Hilton produced solid revenue growth. In Q2 2023, in particular, the company’s revenue per room (RevPAR), the equivalent benchmark for same-store sales, rose by 12.1% compared to last year. Hilton’s performance benefited from steady demand and rising prices, propelling leisure growth to new highs. Also, Business Transient revenues (from business travelers) saw sequential acceleration, overtaking pre-COVID levels again.

Despite challenges faced by the lodging industry during the pandemic, Hilton weathered the storm. While its franchised hotels experienced lower occupancy levels for a period, Hilton’s RevPAR is currently about 9.3% higher than in the same period in 2019, despite company-wide occupancy remaining 3-4% points under their “normal” levels.

RevPAR growth was driven by an increase in average daily rates (ADR). In turn, this was fueled by strong consumer demand, a shift from large corporations to small- and medium-sized businesses in the business transient market, and broad inflationary pressures. To quantify this argument, ADRs have stabilized 10-15% above their 2019 levels. This implies 3-4% compound annual growth.

Simultaneously, occupancy has improved, driven by the gradual recovery of large corporate transient business travel and group business. Combined with strong international RevPAR growth, Hilton is well-positioned for a prosperous 2023.

Hilton’s Net Unit Growth Isn’t Actually Disappointing

Some investors appeared to express disappointment regarding Hilton’s net managed and franchised unit growth, which increased by just 4% year-over-year in Q2. This figure fell slightly short of Hilton’s adjusted full-year target of approximately 5%. Nevertheless, there’s optimism, as net unit growth (NUG) is on the verge of a significant uptick during the latter half of the year.

Management is projecting NUG to reach around 5% for this year, with a further acceleration expected in 2024, reaching a range of 5-6%. This outlook also includes the anticipation of NUG returning to its historic 6-7% range over the next several years, marking a genuinely promising trend. The outlook for net unit growth is particularly bright in 2024. Hilton is gearing up to introduce its new premium economy and long-term-stay concepts, coupled with an acceleration in international development activity.

Additionally, Hilton’s impressive performance is underscored by the signing of over 36,000 rooms in Q2, marking the largest quarterly signing in the company’s history. Concurrently, the company’s pipeline boasts 440,900 rooms, with nearly 50% already in various stages of construction. This robust pipeline makes for a key factor driving the anticipated resurgence in NUG post-2024.

Is HLT Stock a Buy, According to Analysts?

Regarding Wall Street’s view on the stock, Hilton has a Moderate Buy consensus rating based on five Buys and four Holds assigned in the past three months. At $163.00, the average Hilton Worldwide stock price target implies 10.3% upside potential.

If you’re wondering which analyst you should follow if you want to buy and sell HLT stock, the most profitable analyst covering the stock (on a one-year timeframe) is William Crow from Raymond, with an average return of 23.59% per rating and a 63% success rate.

The Takeaway

Overall, I would argue that Bill Ackman’s strong affinity for Hilton Worldwide Holdings stock is well-founded. Hilton’s asset-light business model, characterized by high-margin cash flows from licensing, management, and brand-related fees, sets it apart in the lodging industry. The company’s impressive financial performance during H1-2023, including a 12% rise in RevPAR, further underscores his bullish stance.

Despite some concerns about net unit growth, Hilton’s management anticipates a significant uptick in the latter half of the year and beyond, with the introduction of new concepts and international expansion plans. Featuring such a robust pipeline and a promising outlook, Hilton is likely to remain one of Pershing Square’s top holdings for years to come. Along with its numerous qualities, it may be worth considering whether Hilton could be a suitable addition to your own investment portfolio.

Disclosure

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