Hilton (“HLT”) (HLT, Financial)
Hilton is a high-quality, asset-light, high-margin business with significant long-term growth potential. Over the past three years, management has done a remarkable job of navigating through the COVID-19 pandemic. In the third quarter of 2022, HLT’s revenue per room (“RevPAR”), the industry metric for same-store sales, surpassed 2019 levels for the first time. 2022 benefited from the strength of domestic leisure travel occasions – as consumers’ post-COVID-19 spending shifted from goods to services – and the continued recovery of business transient and group travel.
Hilton’s RevPAR has now surpassed 2019 even though occupancy has not yet fully recovered. RevPAR growth has been supported by an increase in average daily rate (“ADR”), resulting from strong consumer demand, a positive mix-shift from large corporations to small and medium-sized businesses, and broad inflationary pressures throughout 2022. Average daily rates have stabilized 10% to 15% above 2019 levels (representing 3-4% compound annual growth) while occupancy continues to improve as business travel occasions normalize, which should support current RevPAR levels. These factors, combined with an easy comparison from first-half 2022, position Hilton for a year of above-trend RevPAR growth in 2023.
Over the medium-term, Hilton will benefit from continued strong growth from non-RevPAR fee earnings (e.g., Hilton Grand Vacations royalty fees, Hilton Honors American Express card program) and the acceleration of net unit growth back to Hilton’s historical 6% to 7% growth algorithm, aided in part by organic new brand development (notably, the recently announced Spark by Hilton). Strong revenue growth combined with Hilton’s excellent cost control, high incremental margins, and its substantial capital return program should drive robust earnings growth for the foreseeable future.
Despite Hilton’s unique business model and attractive long-term earnings algorithm, the stock remains attractively priced at approximately 24 times forward earnings. We find Hilton’s valuation to be compelling given its industry-leading competitive position, superb management team, attractive long-term net unit growth algorithm, and best-in-class capital return policy.
From Bill Ackman (Trades, Portfolio)'s Pershing Square 2022 annual letter.
