Hyatt outpaced its peers in the third quarter, but shares look overvalued.
02:12 PM | Email Article
reported strong development metrics and RevPAR that outpaced peers in its third quarter, which supports our long-held view that the company is one of the best positioned operators for future growth. That said, we don’t expect any meaningful change to our $40 fair value estimate as Hyatt’s results are tracking in line with our existing model, which calls for around 3% and 5% annual RevPAR and unit growth the next 10 years. We see shares as overvalued and recommend Priceline or Wyndham for investors seeking travel exposure. We believe the market is pricing in sustained mid-single-digit RevPAR growth the next several years, equating to a hotel cycle lasting 15 years versus the average 7-9 year cycle and our eight-year forecast. We believe the current share price also assumes a narrow moat for the company versus our no-moat rating that is driven by Hyatt’s relatively large exposure to owned assets (60% of EBITDA) that results in ROIC below the operator's cost of capital.
Dan Wasiolek is a senior equity analyst for Morningstar.
Total RevPAR rose 2.5%, and Hyatt reiterated its 2016 guidance of 2%-3%, which compares with our existing forecast of 2.6%. U.S. (75% of total EBITDA) RevPAR grew 3.8%, well above the roughly 1.5% reported by Hilton and InterContinental. The company continues to experience strength in its House and Place brands (both brands have 6% RevPAR growth year to date) and overall relatively high exposure to select-service hotels (also 6% RevPAR growth year to date in the Americas region), which remain reasons for our optimistic growth forecasts for Hyatt.
These exposures are also driving strong development with unit and pipeline growth up 7% and 9%, respectively, in the quarter. This is tracking in line with our 7% unit growth forecast for 2016 and is supportive of our annual mid-single-digit room growth estimate over the next 10 years (well above the long-term U.S. industry supply growth average of 1.9%). House and Place are 25% of the existing room base and combined saw 13% unit growth.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.