Summary
- Hilton is a high-quality, capital-light compounder valued at less than 15x normalized free cash flow.
- If the hospitality industry recovers to 2019 levels within ~5 years, Hilton looks very attractive.
- Total returns may be lumpy but should be around 20% annually for several years.
- This is a classic time arbitrage opportunity for long-term investors.
Overview
Hilton is a global brand that needs no introduction. As a brief overview, the company operates nearly 20 leading hotel and hospitality brands across 119 countries and more than 6,000 locations.
(Source: February Investor Presentation)
Revenue and profitability have international exposure but are driven primarily by the US market, with 73% of EBITDA derived from U.S. operations. Europe and Asia-Pacific each account for roughly 10% of EBITDA and represent significant growth opportunities.
While Hilton is a well-known global franchise, the quality of its business is not as widely publicized.
Capital-Light Business Model and Moat
Building and owning hotels is a capital-intensive business that requires significant upfront investment and a high level of fixed costs - not exactly the ideal model. Fortunately for Hilton shareholders, the company owns virtually none of its properties (they own 65 out of 6,000+ properties), and instead, operates as a franchise and management company with a largely variable cost structure. Hotel owners who wish to utilize any of Hilton’s brands pay the company a percentage of gross revenue (or operating profit occasionally) and receive several benefits in return, resulting in a two-sided network for hotel owners and customers.
Competitive Position
Hilton enjoys a self-reinforcing value proposition whereby both hotel owners and customers benefit from its global brands.
Hotel owners that operate under one of its brands immediately gain access to over 100 million Hilton Honors loyalty members that serve as a reliable and growing customer base that generates repeat business. Additionally, owners benefit from Hilton’s broad marketing campaigns, IT and reservation systems, and supply chain purchasing power. Further, the variable nature of Hilton’s fees means that the company only does well when the hotel owners do well and makes paying for each of these benefits a compelling value proposition.
Customers, on the other hand, also benefit from the award-winning loyalty program. Members can redeem points for free nights at Hilton, or with over 70 other partners such as airlines, rental car companies, and Amazon (AMZN). They have access to hotels across the globe at an array of price points and know they will receive consistent and quality service backed by Hilton.
