2023-04-03 18:39:40 ET
Summary
- The company has played it relatively conservatively in the US although the travel industry is still booming.
- There is room for growth in its international business. The company is likely to benefit from the easing of COVID lockdowns in China.
- The company looks ready to play both defense and offense owing to its cycle-resilient characteristics and current favorable market conditions.
Investment thesis
Our analysis below shows that Wyndham (WH) played relatively conservatively in the US although the travel industry is still booming. There is room for growth in its international business. The company is less sensitive to cycle risks and thus makes it a good defensive position in the portfolio. Valuation is not cheap but still in the teens and below the historical median. We recommend a buy at the current level.
Company profile
Wyndham Hotels & Resorts, Inc. is one of the world’s largest hotel franchising companies by the number of hotels, with approximately 9,100 affiliated hotels with approximately 843,000 rooms located in over 95 countries and welcoming over 130 million guests annually worldwide. It operates a hotel portfolio of 24 brands.
Portfolio brands by markets (Company's presentation)
Key Takeaways from the Wyndham Q42022 earnings release:
Its hotel franchising revenues increased by 12% YoY to $303 million, driven by higher license fees and a global increase in RevPAR. Its adjusted EBITDA for this segment also increased by 13%, excluding the timing impact from the marketing fund. Its hotel management revenues decreased significantly by 75% YoY to $31 million, mainly due to the exit of the Company's select-service management business and owned hotels in the U.S. Total revenue decreased by 15% and adjusted EBITDA decreased by 4%, a further deceleration from Q32022 (-12% and -2%, respectively).
Q42022 revenues and profits (Company's filing)
Total System size grew at 4%(U.S. 0.7% and international 9.1%), flat to Q32022. RevPAR grew 15% in Q42022, accelerating from 12% in Q32022.
Q42022 operating metrics (Company's filing)
We have the following comments regarding the earnings:
- The company’s efforts to exit its management business and dispose of its hotel assets are beneficial since they further reduce its risk exposure to labor inflation and real estate valuation volatility.
- Its operating metrics (System size and RevPAR) continued to show stable growth in the U.S. and strong growth in the international market. The business is still healthy.
The company plays conservatively in the US although the travel industry is still booming
Geographically, the U.S. is where the company has the most properties, followed by China, Europe, and Canada. The company generated 84% of its revenues from the U.S. and 16% in the international markets (mostly China). The majority of the company's properties are concentrated in the mid-scale and economy markets.
Geography breakdown (Company's filing) Geography breakdown (Company's filing) Portfolio brands by markets (Company's presentation)
According to management's analysis, the company is expected to benefit from the 2021 infrastructure Act & 2022 CHIPS Act, given that the government spending on roads, bridges, and transportation will lift the travel industry long term.
Government spending breakdown (Company's filing)
The company’s US strategy is to focus on destination-driven customers, as 87% of its US hotels are not near airports, urban or resorts, and 96% of US guests originate the trip domestically.
Survey and stats (Company's presentation) Peer comparison (Company's presentation)
99% of its hotel are franchised. That makes sense given that the majority of its hotel locations are not in busy or urban areas, recruitment can be difficult, and the potential for real estate appreciation is limited.
Also, based on management's stats, the company's portfolio is really resilient and less volatile during economic downturns. This should give long-term investors more comfort to buy into momentum.
Portfolio sensitivity analysis (Company's presentation)
There is room for it to grow its international business
The company has a diverse international presence across China, Asia, and EMEA, including of total 2,945 properties and over 342 thousand rooms.
A couple of stats from different sources suggest the momentum of international travel is still strong.
TSA numbers show that the number of TSA checkpoint travelers in 2023 has grown above the 2019 level. In addition, according to the National Travel and Tourism Office , American spending on international travel reached an all-time-high in January 2023.
NerdWallet's Travel Price Index (Combines data from individual travel categories tracked by the Bureau of Labor Statistics' Consumer Price Index data, such as airfares and lodging), shows flights, car rentals, and hotel prices continue on the rise.
Price change by category (NerdWallet)
According to Trip.com Group Limited (TCOM), the leading travel service provider in China, the recovery of domestic travel is strong after the Chinese Lunar New Year and they expected the strength to continue in the rest of 2023.
The domestic business in China remained resilient and the international business continued to show strong recovery momentum.- Outbound air-ticket bookings and hotel bookings increased by over 200% and 140% year over year in the fourth quarter, respectively.- Overall air-ticket bookings on the Company's global platforms grew by 80% year over year in the fourth quarter.
For the hotel business, overall hotel bookings on our global platform hit a record high, and it was above pre COVID level for four consecutive quarters with domestic hotel bookings in the non-China market increasing by 140% versus 2019.
An interesting thought from the below data:
According to MacroMicro, as of February 2023, China's urban unemployment rate was 5.6%, and the number of the top 31 cities was 5.7%. Teen(ages between 16-24) unemployment rate was much higher, at 18.1%.
China unemployment rate (MarcoMicro)
We think it is too early to say that consumer sentiment has reached the bottom in China. However, the company's position in the economy and mid-scale markets in China is likely to benefit the most from the booming domestic travel trend.
Stable outlook with upside potential
2023 outlook (Company's filing)
The management projected the business is likely to grow in the low single digits in 2023. Based on the company's data, on Dec 31, 2022, the company's global development pipeline consisted of over 1,700 hotels and approximately 219,000 rooms, of which approximately 73% are in the midscale and above segments (56% in the U.S.). We think the guidance is relatively conservative, given its strong fundamentals, positive industry outlook, and solid pipeline of projects.
Valuation and catalyst
Based on valuation metrics calculated by Seeking Alpha, its P/E ratio, EV/EBITDA and P/Cash flow are all higher than the sector median but below the 5-year average. The company is ready to play both defense and offense owing to its cycle-resilient characteristics and current favorable market conditions. We think the investors should prefer this name if they want exposure to the hotel sector. The valuation still seems reasonable to us.
Valuation comparison (SeekingAlpha)
International growth acceleration and a surprising return to mid or high-single digits growth in the US could be the catalysts for the stock. Americans seem to cut spending due to inflation, but not in the travel sector in my view. Also, Americans seem to find international travel appealing since it is less expensive in some countries than domestic travel even after including transportation costs. There is a good chance the momentum could continue or further strengthen.
Risks
Geopolitical risks
Geopolitical conflict is a risk on the rise. If the Russian and Ukrainian wars spread outside the Ukrainian border, there will definitely be a reduction in international travel. Also, the rising autocracy alliance such as China, Russia, Saudi, Egypt, Iran and etc., pose threat to the effectiveness of the legal system. The company's franchising business system is mostly protected by local laws. Frequent changes in policies and regulations could impact the company's profitability and long-term plan.
Leverage risks
The company's current leverage ratio has reached 2.9x. and the company only maintained around $150-200 million cash on hand regularly because of its franchised business model. Part of the share repurchases and dividends in 2022 relied on the issuance of debt. The dividend looks safe, but moving forward, the company should have limited room to raise debt for share repurchases.
Conclusion
Overall, we like its portfolio strategy and current position for the future. We think the company is less sensitive to cycle risks and thus makes it a good defensive position in the portfolio. Valuation is not cheap but still in the teens and below the historical median. We recommend a buy at the current level.
For further details see:
Wyndham Is Well-Positioned To Play Both Offense And Defense