2023-03-08 06:14:50 ET
Summary
- Playa Hotels & Resorts has seen strong RevPAR performance in spite of inflationary pressures.
- Earnings growth has rebounded strongly.
- I take a bullish view on Playa Hotels & Resorts stock.
Investment Thesis: I take a bullish view on Playa Hotels & Resorts given strong RevPAR growth and an encouraging recovery in earnings.
In a previous article back in November, I made the argument that Playa Hotels & Resorts ( PLYA ) has demonstrated impressive revenue growth, but that the company will need to demonstrate further earnings growth in the face of rising costs to justify further upside.
My views appear to have been overly conservative - with the stock up by nearly 60% since my last article:
The purpose of this article is to assess whether the strong growth that we have been seeing in the stock can be sustained from here.
Performance
When looking at full-year performance for the comparable portfolio of Playa Hotels & Resorts, we can see that RevPAR has continued to show strong growth. RevPAR for the Yucatan Peninsula (the largest in the portfolio by rooms) is up by 53.3% from that of last year while that of Jamaica (the second-largest in the portfolio by rooms) is up by 89.5% over the same period.
Moreover, it is notable that while ADR (the average daily rate) saw double-digit growth, growth in RevPAR strongly outpaced that of ADR across all segments of the portfolio. This indicates that customers are not reducing demand in the face of rising prices, and revenue growth is coming from strong organic demand as opposed to simply the effects of higher prices.
From a balance sheet standpoint, we can see that while the cash to total liabilities ratio has decreased from that of September - the ratio still remains slightly higher than that of last year.
Dec 2021 | Sep 2022 | Dec 2022 | |
Cash and cash equivalents | 270088 | 371688 | 283945 |
Total liabilities | 1426742 | 1435516 | 1404958 |
Cash to total liabilities ratio | 0.19 | 0.26 | 0.20 |
Source: Figures sourced from Playa Hotels & Resorts N.V. Third and Fourth Quarter 2022 Results. Cash to total liabilities ratio calculated by author.
From an earnings perspective, we can see that diluted earnings per share has rebounded strongly from that of last year, from a loss of -$0.48 to $0.50 for 2022.
Additionally, we can see that the company's P/E ratio is trading at a substantially lower level to that of last year - while earnings have rebounded strongly.
In this regard, I take the view that even with the recent bullish run - the stock could still have significant potential for upside from here.
Risks and Looking Forward
Going forward, continued growth for Playa Hotels & Resorts is likely to hinge on the extent to which RevPAR growth across the company's portfolio can be sustained in the face of continued inflationary pressures.
The company cites that while lower pressure on food and beverage costs has helped to lessen the effects of inflation across the Yucatan Peninsula portfolio somewhat, this is being partially offset by the effects of higher labour costs as well as increased sales and marketing expenses.
Moreover, while the occupancy rate across the Pacific Coast has increased by 7.5% - this has been driven in significant part by United States and Canadian sourced guests. While the strong rebound in demand from this segment of the market is encouraging - there is the possibility that hotel prices in the U.S. and Canada have become excessive post-pandemic and thus travellers are choosing to avail of cheaper resorts across Latin America. However, should prices continue to see significant rises, then this trend might reverse.
Conclusion
To conclude, Playa Hotels & Resorts has seen a strong rebound in earnings and continued strong growth in RevPAR in spite of inflationary pressures.
While there is a risk that demand could start to plateau in the face of higher prices - I take the view that the company is in a good position to see further growth given earnings performance to date. In this regard, I take a bullish view on Playa Hotels and Resorts.
For further details see:
Playa Hotels & Resorts: Impressive RevPAR Performance Despite Inflationary Pressures