WH - Wyndham Hotels: Potential Corporate Actions In The Limelight

2023-07-10 10:49:15 ET

Summary

• Wyndham Hotels & Resorts, Inc. is reported to be a takeover target for its peer, Choice Hotels, and this is no surprise considering Wyndham Hotels' enticing valuations.
• Wyndham Hotels' current financial leverage is reasonably comfortable, which allows the company to allocate a greater amount of capital to share repurchases.
• My Buy rating for Wyndham Hotels remains intact, as I view corporate actions like buybacks and a potential takeover offer as potential catalysts.

Elevator Pitch

I continue to assign a Buy rating to Wyndham Hotels & Resorts, Inc. ( WH ) stock. With my prior update for WH published on January 2, 2023, I noted that Wyndham Hotels' "mix of defensiveness and growth makes it an attractive investment candidate."

In this latest write-up, I touch on specific corporate actions that might help to re-rate WH's stock price and valuations in a positive manner. These corporate actions include accelerated share buybacks and an acquisition offer for Wyndham Hotels shares. My Buy rating for Wyndham Hotels is supported by the company's upside potential relating to value-accretive corporate actions.

WH Is A Potential Acquisition Target

A May 23, 2023, Seeking Alpha News article cited a report from Wall Street Journal highlighting that Choice Hotels International ( CHH ) could be potentially interested in making an offer to acquire Wyndham Hotels. Seeking Alpha News subsequently published another article on May 24, 2023 quoting from research by Baird that WH "was just put in play due to the ((WSJ)) report" and noted that the company might be taken over by "CHH or another entity."

In my opinion, there are two key factors that make Wyndham Hotels an appealing takeover target for its peers such as Choice Hotels and other financial buyers like private equity firms.

The first key factor is that Wyndham Hotels has characteristics that make it more likely to perform well in a weak economic environment or even a recession.

In its Q1 2023 financial results presentation , WH disclosed that leisure travel and infrastructure-related spending accounted for 73% and 20% of the company's gross room revenues, respectively, last year. This implies that Wyndham Hotels' business is not very dependent on corporate travel, which is more economically sensitive in nature.

On the other hand, foreign tourists also don't have a significant effect on WH's hotel demand. Wyndham Hotels revealed in its first quarter earnings presentation that around 96% of its U.S. hotel guests are locals, and mentioned that approximately 87% of its U.S. hotels are situated in "drive-to locations."

Notably, Wyndham Hotels shared at the company's Q1 2023 earnings briefing that its brands performed better than the industry in the past three major crises for the U.S. hospitality market, namely the Global Financial Crisis, September 11 attacks, and COVID-19.

In a nutshell, many private equity firms and industry players will definitely be interested in buying over a hospitality business, like Wyndham Hotels, which has the ability to do well even in a recessionary economic scenario.

The second key factor is WH's undemanding valuations, which make a potential acquisition value-accretive for buyers.

WH is currently valued by the market at consensus forward next twelve months' EV/EBITDA and normalized P/E valuation multiples of 12.0 times and 17.3 times (source: S&P Capital IQ ), respectively. Wyndham Hotels' all-time historical average EV/EBITDA and normalized P/E ratios were higher at 13.9 times and 21.9 times, respectively.

Separately, Choice Hotels, a potential acquirer and an industry peer, trades at 13.8 and 19.6 times consensus forward next twelve months' EV/EBITDA and normalized P/E metrics, respectively. Both CHH and WH are similar with respect to portfolio mix, as both companies have a high proportion (more than 90%) of franchised (versus self-operated) and select-service (versus full-service) hotels within their respective portfolios as indicated in WH's Q1 results presentation.

In summary, there are good reasons for buyers to be keen on making a takeover offer for Wyndham Hotels, and this could turn out to be a significant re-rating catalyst for the stock.

Share Buybacks For Wyndham Hotels

Wyndham Hotels has capital allocation levers to potentially push the company's share price, even if the company doesn't eventually receive an acquisition offer.

A major potential catalyst for WH is accelerated share repurchases for the remaining quarters of this year. Wyndham Hotels' current valuations and financial leverage are factors that are in favor of the company executing on more share buybacks going forward.

In the preceding section, I have highlighted WH's EV/EBITDA and P/E valuation metrics are below historical mean levels and lower than that of its key peer, CHH. At the company's Q1 2023 results call, Wyndham Hotels acknowledged that its "stock is trading at a significant unwarranted discount" to its "our own estimates of intrinsic value," which implies that one "can expect us to lean in more heavily" towards buybacks.

In addition, Wyndham Hotels has meaningful financial capacity to conduct a meaningful amount of share repurchases. WH's net leverage or net debt-to-EBITDA ratio was 3.0 times as of March 31, 2023, which is at the bottom end of the company's leverage target in the 3-4 times range. WH emphasized at its most recent quarterly earnings call that it has "ultimate flexibility when it comes to share buybacks this year." It is reasonable to assume that excess capital previously set aside for debt repayment could be potentially re-allocated to share repurchases for WH.

Considering Wyndham Hotels' undemanding valuations at this point in time, share buybacks are expected to be value-accretive for the company.

Closing Thoughts

I have chosen to stick with a Buy rating for Wyndham Hotels & Resorts, Inc. I have identified potential re-rating catalysts for WH pertaining to corporate actions such as a potential takeover offer and share buybacks.

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