2023-04-28 00:21:14 ET
Summary
- The management raised guidance and saw strong momentum in the business throughout the summer.
- The current P/E ratio of 17x has already factored in high expectations for earnings growth and buyback.
- The franchiser's return may be affected by higher interest rates if the credit market further tightens.
- The company's position in the budget hotel sector provides downside protection.
Recap
We discussed the company's fundamentals on April 3 in our piece, " Wyndham Is Well-Positioned To Play Both Offense And Defense".
Wyndham Hotels & Resorts, Inc. (NYSE: WH) just reported a beat on EPS and revenue in its Q1 2023 earnings. The stock was up 1.5% post-earnings.
This article is to review its Q1 performance.
Investment Thesis
We maintain our Buy ratings and summarize the earnings as follows:
- The management has raised guidance and seen strong momentum in the business throughout the summer.
- The current P/E ratio of 17x has already factored in high expectations for earnings growth and buybacks.
- The franchiser's return may be affected by higher interest rates if the credit market further tightens, which could dampen its growth prospects.
- The company's position in the budget hotel sector provides strong downside protection.
- The franchisee's recent move into the mid-to-upscale market has provided some upside potential for the company.
Key Takeaways from Q1 2023 Earnings:
- Beat on expectations and momentum continues
Wyndham Hotels & Resorts Non-GAAP EPS of $0.89 beats by $0.09, revenue of $879M beats by $556.32M
The company beat expectations on both adjusted EPS and revenues and raised its FY 2023 adjusted DPS guidance. The company grew comparable revenues by 11% and comparable adjusted DPS by 15%, a similar growth cadence as Q4 2022.
*Comparable revenues and DPS were adjusted by timing variances from marketing funding, sales of its owned hotels, and the exit of its select-service management business.
Management mentioned , as below, that the double-digit growth rate was supported by surprising resilience in customer spending. As we approached mid-April, the management gained more visibility in summer booking. They have no seen signs of slowing down yet.
We outperformed our adjusted EBITDA expectations, leading us to raise our full-year outlook as a result. With our seasonally strongest summer season on the horizon and no signs of a slowdown in our middle-income guests' desire to spend on travel, we're enthusiastic about the opportunities that lie ahead and our ability to deliver outstanding value to our shareholders, guests, franchisees, and team members."
Both its global and U.S. RevPAR grew at the same strong pace in Q4 2022. The company raised DPS guidance as a result of cost-saving initiatives.
2023 outlook (Company's filing)
Although the management maintained an upbeat outlook and the EPS guidance was raised, it didn't change its pricing or revenue guidance. The current outlook suggests a RevPAR decline or slowdown is likely in the second quarter or half of the year.
- The leading indicator showed a stable outlook
The company's new contracts grew 7% in Q1 2023, slightly faster than that in Q1 2022. 72% of the pipeline is in the midscale and above segments. This suggests the franchisees were relatively optimistic and expected the travel boom to persist for 2023 and beyond, though the average royalty rate was down 10 bps.
Growth Drivers
- International market growth
As compared to March, Jefferies estimated that Macao's tourism momentum would continue in April 2023, with an 11% increase in daily average revenues. This can also be supported by the level of excitement expressed by Las Vegas Sands' management during its Q1 earnings call (LVS).
Our focus is on all segments in the Macao market , including international tourists.
There hasn't been a huge influx of Chinese visitation in the early part of the quarter. But there is an ongoing ramp of outbound tourism from China"
Wyndham has a strong presence in Macao, including 11 banners such as the upscale Wyndham Grand, midscale Hawthorn, economy Super 8, etc. If the growth trend persists, the company is likely to continue to grow its earnings.
- Domestic growth propelled by government spending
The 2021 Infrastructure Act & 2022 CHIPS Act provided a total of $1.5 trillion in infrastructure spending over the next eight years. The company expected this to be a $3.3 billion opportunity for its franchisee and $150 million for the company. The company affirmed that the projects were still on track in its Q1 earnings.
Government spending (Company's filing)
Valuation
Excluding the 2020 pandemic period, its P/E ratio of 17.1x was at a historical low compared to its historical P/E ratio since its spinoff in 2019.
Historical P/E ratio (Macrotrend)
We think the decrease in valuation multiples was attributed to the lower franchisee's investment return due to the rate hike.
The cash-on-cash investment return was 16% for franchisees, assuming a 7% interest rate. The return can decrease further if the rate hike persists. As a result, the company's franchise business can be impacted.
Franchisee investment return (Company's presentation)
However, we think the view is conservative. Recent projects undertaken by the franchisees have been focused on mid-to-upscale hotels that have the potential for high revenue per available room (RevPAR). This can offset the increased interest expense as a result of the rate hike. Also, the company had not seen projects canceled or affected much after the banking crisis in March.
Moreover, we think the company's decision to exit the hotel management business in March 2022 was margin accretive.
Hotel management receives a fee but is resource-intensive. From an accounting standpoint, it is a low-margin business compared to the franchising model. This initiative increased the company's EBT margin from 28% to 29% in Q1 2023. So, in our opinion, it deserved an increase in the valuation multiple.
Notably, management projected 6% comparable EBITDA growth in 2023. This projection, however, has resulted in a relatively high PEG ratio of 2.85x, which some investors consider expensive. The concern is that the high expectations of growth may not be sustainable, especially given the anticipated slowdown in the second half of the year.
Catalysts
- Revenue growth
If the China market rebound momentum can persist through 2023, there can be surprising growth on the upside.
Also, the management has a history of giving conservative guidance at the start of the year. The company increased its DPS by 50% in 2022 and outperformed its initial forecast by 10%. The 17x P/E ratio can be justified if management exceeds expectations in 2023.
- Share repurchase
The company repurchased $87 million in shares in Q1 2023, an increase of 40% compared to last year. The repurchase amount was also slightly higher than its free cash of $84 million in the quarter.
The management announced that they would return excess cash to shareholders if they didn't find any attractive investment opportunities. In 2023, the company is anticipated to produce a free cash flow of above $200 million. This will support the stock price even further.
Risks
- Lower-than-expected growth
We think the market still expects the company to continue its double-digit growth in earnings in 2023. If the market slows sooner than the company's original projection, there is a risk for the stock.
Summary
Although the management raised guidance and continued to see strong momentum in the business throughout the summer, the current P/E ratio of 17x has been priced in with high expectations for its earnings growth and buyback. Also, the franchisees' returns can be impacted by higher interest rates if the credit market further tightens. This can dampen its growth prospects. These are risks to watch out for.
However, we still have strong confidence in the management and expect the buyback and cost savings to support its earnings growth.
The stock's risk and reward profiles are still balanced. Because of its dominance in the budget hotel sector, the company is still well protected. At the moment, the franchisee can still leverage the company's brand name to get credit to grow. Moreover, the franchisee's latest move into the mid-to-upscale market provided some upside for the company. In conclusion, we maintain our Buy ratings.
For further details see:
Wyndham Q1 Earnings: No Signs Of Slowdown