The travel industry experienced a strong rebound in 2022 following the challenges that persisted during 2020 and 2021. Hotels stocks, including the two giants in the space, Marriott International, Inc. (NASDAQ: MAR) and Hilton Worldwide Holdings Inc. (NYSE: HLT), have already rebounded significantly, with their revenues and profits surging over the past year. Nevertheless, their shares may not be worth holding into 2023, as they already appear quite overpriced.
From the Ditch to Record Profits
When the COVID-19 pandemic hit, it adversely impacted travel, of course. One of the outcomes, among others, was a severe decline in demand for hotel rooms as people canceled their business and holiday travel plans. Hotels saw a substantial drop in occupancy rates, revenues, and profits, with many even forced to temporarily close their doors. Shares of Marriott International and Hilton Worldwide Holdings, which are by far the two largest companies in the field, slumped at the time.
However, hotel companies are currently experiencing a tremendous improvement in their performance. For context, in its most recent Q3-2022 earnings report, Hilton recorded revenues of $2.37 billion, up 35.4% year-over-year. Increased demand for lodging led to system-wide comparable RevPAR (Revenue Per Available Room) growing 29.9% on a currency-neutral basis. Margins expanded as the company scaled, causing adjusted EBITDA to jump by an even more impressive rate of 41% to $732 million.
Marriott also recorded an equally impressive surge in Q3 revenues, in its case, by 34.7% to $5.31 billion. Revenue growth was driven by system-wide constant dollar RevPAR growth of 36.3% worldwide, and similar to Hilton, a margin expansion pushed adjusted EBITDA to $985 million, up 44.2% compared to last year.
Due to cost-cutting measures, the two companies took during the pandemic, combined with such a fierce spike in revenues, Marriott and Hilton are set to achieve record profits this year. Analysts expect Hilton to report earnings per share of $4.53 for the year, up 118% compared to Fiscal 2021, while Marriott is expected to achieve earnings per share of $6.53, up 105% compared to last year. Who would have thought a couple of years ago, when hotels were totally lifeless, that they would so soon return to report record earnings.
What to Consider When Valuing MAR and HLT
When it comes to valuing Hilton and Marriott, we have to consider the value of their brands. If you are not familiar with the two companies, you may assume that it’s a good idea to value them through their book value. After all, they are hotel chains, and they own real estate – thus, book value sounds like the appropriate metric.
However, the truth is that both Marriott and Hilton own only a fraction of the actual real estate assets. Instead, both companies leverage their brands to collect licensing and management fees, operating an asset-light business model. For instance, out of 8,162 Marriott properties, the company owns only 64! Meanwhile, 6,029 and 1,959 of its properties are franchised and managed, respectively.
Therefore, despite the real-estate nature of their operations, it’s not necessarily the right move to value these companies via their book value. This also explains why both companies appear to be so insanely profitable, with massive EBITDA margins based on the numbers shared earlier. It’s because they receive frictionless, high-margin royalties.
In this case, the traditional P/E ratio will do just fine. Based on Marriott’s and Hilton’s expected earnings per share for 2022, as mentioned earlier, the two companies essentially trade at P/E ratios of around 28x and 23x, respectively. The higher premium on Marriott is due to investors expecting faster bottom-line growth in the coming years. In fact, both companies are expected to grow earnings per share quite aggressively (above mid-teens percentages), which somewhat justifies these multiples.
Nevertheless, I find these multiples pricy in a rising-rates environment, especially considering a recession in 2023 is not unlikely, which could significantly slow down travel, reversing analysts’ expectations in terms of future earnings growth.
Is MAR Stock a Buy, According to Analysts?
Turning to Wall Street, Marriott International has a Hold consensus rating based on two Buys, eight Holds, and one Sell assigned in the past three months. At $171.75, the average Marriott International price target implies 16.5% upside potential.
Is HLT Stock a Buy, According to Analysts?
As far as Hilton Worldwide Holdings goes, the stock has a Moderate Buy consensus rating based on four Buys and six Holds assigned in the past three months. At $146.56, the average Hilton Worldwide Holding price target implies 17.5% upside potential.
Takeaway – Decent Lodging Picks, but Risks Remain
Both Marriott and Hilton appear to be decent picks in the lodging industry, but their investment cases are not without risks. While their financials have rebounded quickly, so have their shares. At their current prices, the market is essentially pricing that the industry will have a tremendous 2023 and 2024, which is quite uncertain given the tough macro environment.
Additionally, there’s also the factor of gradually changing preferences for accommodations to consider. In recent years, there has been a trend towards alternative styles of accommodations, including unique vacation rentals (e.g., Airbnb (NASDAQ: ABNB)) and boutique hotels. These alternatives could continue capturing a bigger market share as travelers increasingly value privacy, more space, and unique experiences over traditional hotels. Consequently, traditional lodging could face increased pressure in the coming years, which could also negatively affect the performance of Marriott and Hilton.