Stock decline doesn’t dissuade Hyatt analysts

Hyatt Centric at the Loop in Chicago

By Xuanyan Ouyang

Hyatt Hotels Corp. is facing headwinds under the influence of the recent market slide, but analysts are expressing optimism about the year ahead.

The Chicago-based company, which owns, operates, manages, franchises and licenses hotels, resorts branded residences and vacation properties as well as provides hospitality services, has a portfolio of 627 properties in 52 countries and six continents. It has witnessed a steep fall of its stock price since last July.

Hyatt closed Thursday at $43.45, down sharply from $58.56 on Jan. 9, 2015. According to Yahoo Finance, the analysts’ mean target price of the stock is $51.05.

Bloomberg shows that 12 analysts say buy the stock, with another seven advising hold, and three sell. The 52-week range is $34.06 and $61.99.

“We are in the downward leg of the hotel cycle,” said Goldman Sachs analyst Steven Kent in a note to his clients in mid-January, “which will be characterized by rising supply, weakening demand, downward estimate revisions and multiple contraction. ”

Kent downgraded the target price of Hyatt to $33 from $47 by 8.8 percent in mid-January. Other than “more operating leverage than its peers”, he also said it was based on the company’s weaker finance levers (which means more borrowing), and Hyatt’s overexposure to urban markets which have witnessed the biggest increase in supply. MKM Partners analyst Christopher Agnew also slashed Hyatt’s target price to $37 from $59 on Jan. 14.

However, analyst Dan Wasiolek at Morningstar Inc. viewed the fall of Hyatt’s stock as part of a correction of overvalued hotel stocks.

“It’s a function of overall economy growth concern worldwide, which has caused a lot of cyclical-exposed stocks, such as hotel stocks, to correct in the last few months,” said Wasiolek. “Hyatt certainly is a cyclical stock. Hyatt and all the hotel operators, six months ago they were overvalued. So this correction brings the stocks even more in line with what we think they should value. We are not surprised by the correction that’s occurring. ”

Nevertheless, he added, the lodging sector is still strong.

“Typically, hotel cycles lasts anywhere from seven to nine years. 2015 was year six of this recent hotel cycle. So we actually believe the hotel cycle will remain positive and solid through 2017,” said Wasiolek. “But then beginning in 2018 you are going to see more industry supply that is going to start to outstrip global demand and end this recent hotel cycle.”

Bob Rauch, a recognized hotelier with over 40 years of hotel management experience, also predicts solid growth for the hotel industry.

Rauch wrote on, “We expect to see a very strong finish to the year and a record financial performance for the lodging industry in 2016.” And he forecast, “the next twelve months will be the best twelve month period the hospitality industry has ever experienced”.

But concerns with Hyatt’s performance still exist.

In 2015 revenues dropped 2 percent to $4.33 billion from $4.42 billion in 2014, and earnings, burdened by a hefty charge, sank 64 percent to $124 million, or 86 cents per diluted share, from $344 million, or $2.23 per share.

Like other international companies, Hyatt is experiencing a significant drag from the strong U.S. dollar. The foreign currency translation setback was $26 million last year.

Hyatt’s average daily rate, or ADR, increased 1.4 percent to $216 from $213 the first nine months of 2015. The room occupancy rate rose to 77.7 percent, and revenue per available room, or RevPAR, increased to $168 from $164.

Analysts see these improvements as indication that Hyatt’s performance is still good. It has opened seven select service hotels and two full service hotels worldwide since during the three months ended September 30 last year. Those new hotels cover Dubai, Honduras, Japan, China and U.S. From late January, Hyatt also announced it will open hotels in Aqaba of Jordan in Asia, Managua of Nicaragua in Central America, Montevideo in Uruguay of South America, as well as one at San Francisco International Airport.

Wasiolek said Hyatt is heading in the right direction, though investing in developing regions such as China in the short term may cost much, it is sustainable in the long run.

“Hyatt is more U.S.-based than other global brands. Just focusing on the near term in this year, I think the confidence that I would have for the hotel market would be higher in the U.S. than in international markets.” said Wasiolek. “You know, China and Latin America specifically have economic concerns in those regions. Hyatt is not that exposed to those regions. They also have pretty strong brands that are relevant to the millennial demographic. ”

“If we have a stable growth environemnt in the U.S., which at this point in the U.S. travel is the case, I would say Hyatt is in the middle or somewhere above the others in 2016, ” Wasiolek added.

Photo at top: Many analysts are positive about Hyatt’s performance in 2016. (Xuanyan Ouyang/MEDILL)