Hilton Worldwide Holdings Inc. (HLT, Financial)
Hilton is a high-quality, asset light, high-margin business with significant long-term growth potential, led by a superb management team. We invested in Hilton in 2018, among other reasons, because we believed Hilton's unique value proposition would allow the company to compound earnings per share at a mid-teens growth rate over the long-term. In 2019, our investment thesis began to play out, as Hilton delivered strong business performance and increased earnings 14%, despite a muted industry backdrop.
Unfortunately, Covid-19 and the associated travel restrictions and domestic stay-at-home orders severely impacted the global hotel industry beginning earlier this year. Industrywide revenue declined precipitously beginning in March 2020, as many hotels closed or experienced large declines in occupancy. In response, Hilton's management team took decisive action, right-sizing Hilton's cost structure for the current economic situation, and fortifying its balance sheet.
System-wide occupancy appears to have bottomed in April 2020 at roughly 13%, and has rebounded as the lifting of travel restrictions has led to a slow but steady sequential improvement in occupancy. In the Americas, occupancy increased to approximately 45% as of August, and in China, occupancy is now greater than 60%, a faster recovery than initially expected. While we expect Hilton's revenues to continue to be negatively impacted by the crisis, hotel revenues and occupancy should progressively recover with increases in economic activity, leading to a recovery over the next several years. We believe the decisive cost reductions taken by Hilton management will likely lead to higher profit margins when it eventually returns to 2019 levels of demand.
While it is difficult to determine the long-term impact of the pandemic on business travel, we believe that an increase in working from home may drive greater hotel demand over the long term, as workers return to corporate headquarters periodically from more distant home-work locations, and companies choose to hold more corporate offsites to maintain and build culture. While video conferencing has been an effective tool during the crisis, we believe that in-person presentations and meetings will remain more effective than Zoom. When a company loses a piece of business to its competitor's in-person sales pitch, it won't be long for the sales manager to require all future pitches to be in person. Video conferencing does not come close to the business and networking benefits of corporate conferences. Technology has yet to create a virtual replacement for in-person networking.
Vacation travel is beginning to recover as perceived and actual pandemic risk fades, and as hotels adopt safety procedures that satisfy their customers concerns. As Hilton management has noted, occupancy has been boosted by increasing demand for limited service hotels and drive-to leisure markets. For example, over the July 4th weekend, approximately 800 of Hilton's hotels in the U.S. (~16%) experienced greater than 80% occupancy.
Moreover, we believe that the crisis will likely increase Hilton's market share as independent hotels seek an affiliation with global brands like Hilton – whose safety standards (Hilton recently announced a Mayo Clinic-approved protocol) and reputation for consistency should generate greater consumer confidence than protocols developed by independents. We believe that Hilton is well positioned to succeed because it has the best management team in the industry, a portfolio of great brands, a dominant market position, a capital-light economic model, a deep development pipeline, and a strong balance sheet.
Hilton's stock has decreased 20% year-to-date. After adjusting Hilton's intrinsic value for the reduction in its valuation from the crisis' impact on short, intermediate and long-term revenues and cash flows, we believe that Hilton's stock remains highly attractive at its current valuation.
From Bill Ackman (Trades, Portfolio)'s Pershing Square 2020 semiannual shareholder letter.
