2024-01-12 15:03:57 ET
Summary
- Wyndham Hotels & Resorts gets a Buy rating.
- Single-digit earnings and revenue growth in Q3, and positive full year outlook.
- Dividend income stable and grew +80% from 2018.
- Lower recession forecast in 2024 than expected, along with surge in expected travel demand, and strong recovery in this sector since the pandemic era.
Stock & Industry Snapshot
In today's research note, with several months away from the peak summer travel season, we are taking a look at the hotels sector by rating Wyndham Hotels & Resorts ( WH ).
From its profile on Seeking Alpha, we know that it trades on the NYSE, is headquartered in New Jersey, and has two business segments called hotel franchising and hotel management.
Its brand portfolio includes many known hotel brands like Wyndham Garden, Days Inn, Super 8, Travelodge, and Ramada, among others.
As with airlines and cruise lines, I would say this industry is more sensitive to recessionary times than some others as both business and leisure travel may drop during recessions, but as we have seen also during global pandemics.
Equities Analyzer
New for 2024, we introduced our Equities Analyzer , which looks at this stock across 8 metrics such as revenue and earnings growth, equity and dividend growth, dividend yield vs peers, and valuations (P/E and P/B ratios).
Here are our results for this stock:
Revenue Growth
What we can see from income statement data is that revenue grew by single digits on a YoY basis:
WH - revenue growth (author)
From the Q3 earnings results , we discovered that some key drivers of the positive revenue growth included "system-wide rooms growth 3% YoY" and the "development pipeline grew 12% YoY to a record 237K rooms."
A key metric to track here is RevPAR, or revenue per available room, which is a performance metric in the hotel industry, and as of Q3 this figure grew at Wyndham both in the US and globally:
WH - RevPAR growth (company Q3 results)
A notable item to mention was that the company was almost acquired by competitor Choice Hotels ( CHH ) however according to the company their board of directors rejected the bid offer.
Also, the company has kept its full year FY23 outlook anticipating single-digit growth in rooms, RevPAR, fees and other revenues:
An item to mention when thinking about their future growth sustainability prospects is the fact that they continually are growing properties and rooms worldwide, which I think can lead to more revenue-generating properties eventually.
Here is what they said:
Company's global development pipeline consisted of over 1,930 hotels and approximately 237,000 rooms, representing a 12% year-over-year increase, including 16% growth in the U.S.
So, my impression when it comes to revenue growth is a modestly bullish one.
Earnings Growth
Also from the income statement , we know that earnings (net income) grew by single digits, for practically flat growth on a YoY basis:
WH - earnings growth (author)
On a positive note, both operating expenses and interest expense did not grow tremendously on a YoY basis.
Looking ahead, the prospects for 2024 and beyond I think are modestly positive due to continued property growth which will drive top-line revenue, a resurgence in travel post-pandemic, and the prospect of lower interest rates later this year since we know according to CME FedWatch there is a 65% probability of the Fed lowering rates after their March meeting.
This should spell some relief for companies like this who depend on debt financing.
I think the case here is for a hold.
Equity Growth
What the balance sheet tells us is that equity (book value) dropped by double digits on a YoY basis:
WH - equity growth (author)
Compared to some large companies of this stature that I have covered lately, this company has relatively low book value at less than $1B. On a positive note, its long-term debt (which can impact equity) has not risen that much and is hovering around $2B.
According to their Q3 statement:
The Company ended the quarter with a cash balance of $79 million and approximately $710 million in total liquidity.
We can also see they have the capacity of continuing dividend payouts and share repurchases.
However, when looking at the balance sheet from June 2022 to now we see a continuous declining trend in equity.
As my portfolio strategy is to look for positive equity growth when possible, I think the case here is for a sell.
Dividend Growth
Using dividend growth info , we know that dividends began paying in 2018, and in 5 years grew by nearly 87% to $1.40/share/annually:
WH - dividend growth (author)
So far, the company has not mentioned additional dividend hikes that I know of, but in their last release they boasted of how they returned "$134 million to shareholders through $105 million of share repurchases and a quarterly cash dividend of $0.35 per share."
With earnings showing single-digit growth, and cash flow continuing to be positive each quarter, my educated guess is that there is at least a slight chance of another dividend hike in 2024, if profitability growth continues.
So, this rating category presents a nice buy case for me as a dividend investor.
Share Price vs Moving Average
Here, let's take a look at the current price chart as of Thursday afternoon:
We can see that this afternoon's share price is double-digits above the 200-day simple moving average:
WH - share price vs SMA (author)
What we know, therefore, is that a buyer is paying above average for a company that has shown strong dividend growth in 5 years as well as low single-digit earnings and revenue growth, and double-digit declines in equity. It is also a company that continues to grow hotel properties, which will produce future revenue.
Given all the factors mentioned, I will say the case is for a hold rather than a sell.
Dividend Yield vs Peers
From dividend yield data , it tells the story of Wyndham's dividend yield being at 1.73% today, around half a percent less that the sector average but above its hotel peers Marriott ( MAR ) and Hilton ( HLT ):
WH - dividend yield vs peers (author)
At below 2% dividend yield, I don't think it presents a really great case for a dividend yield to try and snatch up right now, when some of the recent stocks I covered in other sectors can fetch nearly 5% or more in yield.
However, when it comes to yield it is best to compare within the same sector, and in this case it beats two key hotel peers but is slightly below its sector average, so I would not necessarily throw this stock in the garbage can just yet because of a 1.7% yield. It seems like more of a hold than a buy or sell.
Valuation: P/E Ratio
From valuation data , what we can learn is that the forward P/E ratio is now at 21.88 and is a double-digit percentage above the sector average:
WH - P/E ratio (author)
When comparing this valuation to the data on share price and earnings we discussed already, we know that the share price is trading at an +11% premium to its long-term moving average, while earnings barely grew 2%, or practically flat earnings growth.
In this case I would call it just modestly overvalued , since on the one hand there was price growth but there was also at least some earnings growth, though it will need to grow more to catch up to such a bullish share price, to close this valuation gap some more. The market is being a bit too bullish for a company with such a low earnings growth, in my opinion.
Valuation: P/B Ratio
Also, from valuation data we learned that the forward P/B ratio is now at 8.44, and a triple-digit percentage above its sector average:
WH - P/B ratio (author)
The rift here between price and book value at first appears high, but when taking another look at share price and equity growth we know that the share price is not only trading at 11% above its moving average but equity dropped by nearly 19%.
The share price is also around $14/share above its autumn lows, while equity has dropped to less than $1B in book value for a company of this size and stature.
So, this is clearly an overvaluation case, based on the evidence. I believe the market is simply being too bullish on a stock with declining equity.
Key Risks
At this point, the stock is tied between being a hold and a sell, so I want to touch upon a key downside risk this company could face and its risk impact and probability.
The key risk for this type of business is whether external factors cause a major drop in demand for hotel rooms. These factors could include global pandemics or major recessions, as well as globally significant terrorist incidents like 9/11 which also disrupted travel. We know as of now the 2020/2021 pandemic-related travel slump is behind us but do not know yet of future pandemics.
The same is true for future geopolitical conflicts and terrorist incidents, since they can happen pretty much anywhere. We can also consider things like recession risks.
Going into 2024, we know that hotel occupancy globally has improved greatly since 2020, according to Statista :
As for a recession in 2024, yesterday's Forbes magazine article does not believe there will be one at all, citing ratings agency Fitch:
During a Wednesday webinar, Fitch Ratings' Chief Economist Brian Coulton said the credit rating agency no longer forecasts a U.S. recession in 2024. This change in tone is reportedly due to various indicators of economic strength.
Considering that the hotel industry is also closely tied to sister industries like airlines and demand for airline travel, how are things looking in 2024 on that front?
Back in December, I was bullish on Delta Air Lines , practically agreeing with the ratings consensus, on the expected surge in travel demand this year.
I also want to cite a December article in CNBC which highlighted the positive 2024 outlook for airlines from industry group IATA (Intl Air Transport Association):
Total revenues in 2024 are set to grow 7.6% year on year to a record $964 billion, with around 4.7 billion people expected to travel in 2024, a figure exceeding the pre-pandemic level of 4.5 billion seen in 2019.
The evidence overall does not point to a case for a sell of this stock, but I am still cautious as there has been an uptick in geopolitical conflicts as of late and we don't know yet how far those will spread, so the case here is for a hold rather than a buy.
Summary and Rating
To summarize, here is my score matrix with the results of today's analysis:
My impression of this stock, from the overall evidence and total score in the matrix above, is that it is a hold.
Key strengths come from revenue and dividend growth as well as growth in new hotel properties. A bearish tone is coming from poor equity growth and overvaluation, while a more cautious and neutral tone from a lackluster dividend yield and share price trading in double-digit percentages above its moving average. The downside risk of recessions and slump in travel for 2024 is not highly likely according to evidence and forecasts.
My portfolio strategy with this stock would be continue holding on and earning that stable dividend income, and potentially keeping this one longer rather than looking for a quick capital gain just yet.
For further details see:
Wyndham Hotels & Resorts: Bullish On 2024 Travel Demand And Hotel Growth