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Megan Hickey/ MEDILL

Hyatt is one of the country's best known hotel brands but trouble might be stirring for the Chicago-based company despite an upsurge in business-related travel.


Hyatt runs into headwinds

by Megan Hickey
Nov 29, 2012


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Megan Hickey/ MEDILL

Hyatt Hotels Corp. has been adding to its assets, but company leaders warn that future growth will not be as strong.

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Megan Hickey/MEDILL

Hyatt has 496 properties and counting. This River North location is set to open in September 2013.

Business travel is surging. Hotel occupancy rates are up across the board. Hyatt Hotels Corp. is capitalizing on a revitalized travel industry by acquiring new properties and renovating its already large empire of hotels. But while all the vital signs point to a strong future for Hyatt, governance issues and a grim message from company leaders have dampened investors’ enthusiasm for the company’s shares.

Hyatt’s CEO Mark Hoplamazian’s assessment of the near future was less than rosy during an Oct. 31 earnings call with analysts. “Market dynamics are leading to slower growth in the short-term,” Hoplamazian said. He warned that approaching quarters would see a “more modest” trajectory, and he pointed to a decline in advance group bookings due to the uncertainty surrounding the fiscal cliff.

Analysts and investors alike were left discouraged by the message. Financial services firm Cantor Fitzgerald revised its target price on Hyatt shares to $38 from $42, citing “tougher business conditions” as one reason for the downgrade. Hyatt’s stock price also responded to Hoplamazian’s concerns by dropping 4 percent.

But it’s hard to see the shortcomings when one looks at Hyatt’s recent sales and acquisitions. According to analyst Nikhil Bhalla of FBR Capital Markets & Co. Inc., Hyatt has made some great deals lately. The chain has made acquisitions in Minneapolis and Birmingham, Ala., and has opened hotels in fast-growing regions such as Southwest China, Malaysia, and India just the third quarter alone. “They have a very disciplined outlook on sales and acquisitions, and this will benefit them enormously,” Bhalla said. Hyatt is also tapping into bustling areas surrounding major cities like Washington, D.C.

Renovations to hotels in Atlanta and San Francisco, and planned renovations that include a hotel in Santiago, Chile, are more signs of a growing Hyatt footprint. While renovations are initially a cash drain, they are usually met with swift payback upon completion, Bhalla says.

Such activities have provided a positive stream of revenues for Hyatt, which went public in November 2009. Earnings rose 18 percent to $72 million in the first nine months of 2012 from $61 million in the year-ago period.

Before Hyatt went public, the hotel chain was owned by one of the wealthiest families in the U.S. – Chicago’s Pritzker clan – and it was sold as part of the break up of the family’s empire. Once an entirely family-owned company, today Hyatt’s top shareholders are institutions and mutual funds. Mutual fund giant Fidelity Investments is the largest shareholder with nearly 7 percent of the Hyatt’s stock.

So what are Hyatt investors worried about?

When looking for signs of weakness, Pong points to differences between Hyatt and two of its biggest industry competitors: Marriott International Inc. and Starwood Hotels & Resorts Worldwide Inc. Both companies issue guidance for future quarters, but Hyatt does not. This fact compounded with Hyatt’s complex management structure is why Pong cites transparency as one of Hyatt’s biggest issues. “Analysts want to model the company but it’s hard to understand its structure.”

When asked to comment on why Hyatt does not offer guidance, public relations representative Stephanie Sheppard declined to comment directly but said Hyatt is focused “on improving performance in our existing hotels and by expanding our presence in new markets or markets in which we are under-represented.”

Because there isn’t much transparency, analysts are forced to provide very broad ranges for their estimates. Actual results sometimes widely miss the projected estimates, which can hurt investor confidence, analysts say. Hyatt representatives did not return calls for comment about why the company doesn’t provide earnings guidance.

Hyatt also hasn’t done very much in terms of investor outreach, analysts add. “Corporate leaders usually try harder to put their investors at ease,” Pong said, but Hyatt has done little in terms of informing shareholders about company strategy.

“It can be really frustrating trying to wrap your head this company,” Pong said.

Hyatt responded to some of Wall Street’s complaints with a third-quarter “company realignment.” “We made new appointments and consolidated a number of activities and started operating under the new organizational structure as of October 1,” Hoplamazian said. The most notable change was the departure of Hyatt’s CFO Harmit Singh, who was replaced as CFO by Gebhard F. Rainier in August. Rainier has more hotel operation experience, which Hoplamazian thought would be more beneficial for Hyatt’s leadership team.

According to a statement by Hoplamazian, two newly formed groups, real estate and capital strategy, will report directly to the CEO and focus on finances.

Hyatt also is aggressively buying back its stock. The company announced a $200 million share buyback program in August and has since completed $69 million worth of common stock repurchasing. Many analysts consider stock buybacks a good sign. In theory, repurchasing shares returns capital to investors and helps boost a company’s earnings per share.

Hyatt is likely repurchasing shares because it feels they are undervalued. Bhalla agrees, saying the company’s shares are cheap relative to the “intrinsic value of the company.” Hoplamazian referred to the buybacks as a “strategy of investing in growth.”

But analyst Paul Hodgson of GMI Ratings explained that stock repurchasing isn’t necessarily the best tactic. “In the short term, it does return capital to shareholders and raise the stock price.” But Hyatt is using a significant portion of its cash on these repurchases, which concerns Hodgson. “There are more beneficial long-term investments of that cash” such as property acquisitions that could be “more constructive than a buyback,” he says.

When it comes to future growth, both Bhalla and Pong see great potential for Hyatt, which currently has 496 properties around the world. “Hyatt is more anchored to the U.S. than Marriott and Starwood,” which are larger companies with a stronger international presence, Pong explained. The current climate of sluggish demand abroad is going to hurt those companies more than Hyatt. “The U.S. is somewhat of a safe haven in terms of lodging demand,” Pong said.

Both Baird and FBR Capital currently have “outperform” ratings on Hyatt shares, although Bhalla lowered his target price to $43 from $46 after Hoplamazian’s earnings call. Hyatt’s current price, around $35 a share, is on the lower end of its 52-week range of $33.48 and $44.49.

But the company’s price-earnings ratio is the figure that stands out the most to investors. Hyatt’s 12-month trailing P/E is 48.41, nearly three times the S&P 500 Index’s P/E ratio of 15.66. That makes Hyatt a very expensive stock, especially when compared with Marriott and Starwood, which have P/E ratios in the 20s.

The real reason that Hyatt’s P/E is so high is because the company owns a lot more of its hotels than its competitors do. Depreciation is therefore a big expense for Hyatt, which drags down its earnings and inflates its P/E. When it comes to industries that involve real estate, EBITDA – earnings before interest, taxes, depreciation and amortization – is a much more important indicator. On an EBITDA basis, Hyatt’s P/E ratio falls to about 12.

Issues with P/E ratio and transparency aside, Hyatt should still expect some headwinds in the next few quarters. In his research note, LaFleur discussed the risks of currency fluctuations for Hyatt’s investments abroad, especially in China and India.

Bhalla also discussed the risk of investing millions of dollars in renovations to Washington, D.C., Dallas, and Santiago hotels that are not guaranteed to generate higher profits. Sometimes expensive upgrades to hotel facilities don’t pay off because of economic conditions outside of a company’s control.

Another risk entirely out of the company’s hands is the threat of another natural disaster such as Superstorm Sandy, which is sure to make a dent in fourth-quarter earnings. Thousands of bookings were canceled due to the October storm that ravaged the East Coast. As the area continues to recover from damages, few can forget the image of the crane dangling 90 feet above the street from the construction site of the Park Hyatt New York, one of the most famous casualties of the storm.

Still, the effect of the storm will only be short-term and then some analysts believe the company’s horizon will brighten. “Hyatt is on the right path if it can get through the next two to four quarters of headwinds,” Bhalla says.