With a daily gain of 2.99%, a 3-month gain of 6%, and an Earnings Per Share (EPS) of 4.79, Hilton Worldwide Holdings Inc (HLT, Financial) presents an intriguing prospect for value investors. But the question remains: is the stock modestly undervalued? This article delves into a comprehensive valuation analysis to answer this question. Let's dive in.
Company Introduction
Hilton Worldwide Holdings Inc (HLT, Financial) operates 1,127,430 rooms across its 20 plus brands, addressing the premium economy scale through luxury segments. As of December 31, 2022, Hampton and Hilton are the two largest brands by total room count at 28% and 13%, respectively. The company has launched several brands over the last few years, including Home2, Curio, Canopy, Spark, Tru, Tempo, and Project H3. The majority of its adjusted EBITDA comes from managed and franchised operations, predominantly from the Americas regions.
As of September 08, 2023, the company's stock price stands at $152.79, while its GF Value, an estimation of fair value, is $171.85. This suggests the stock could be modestly undervalued.
Understanding GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, computed based on historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line gives an overview of the fair value that the stock should ideally be traded at.
If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. Given Hilton Worldwide Holdings (HLT, Financial)'s current price of $152.79 per share, the stock is believed to be modestly undervalued, suggesting its long-term return is likely to be higher than its business growth.
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Assessing Financial Strength
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Hence, it's important to carefully review a company's financial strength before deciding to buy its stock. Hilton Worldwide Holdings has a cash-to-debt ratio of 0.08, worse than 82.93% of 826 companies in the Travel & Leisure industry. GuruFocus ranks Hilton Worldwide Holdings' overall financial strength at 4 out of 10, indicating poor financial strength.
Profitability and Growth
Investing in profitable companies, especially those demonstrating consistent profitability over the long term, typically poses less risk. Hilton Worldwide Holdings has been profitable 9 out of the past 10 years. Over the past twelve months, the company had a revenue of $9.80 billion and Earnings Per Share (EPS) of $4.79. Its operating margin is 23.54%, which ranks better than 86.34% of 820 companies in the Travel & Leisure industry. Overall, GuruFocus ranks Hilton Worldwide Holdings' profitability at 7 out of 10, indicating fair profitability.
Growth is one of the most important factors in the valuation of a company. Hilton Worldwide Holdings' 3-year average revenue growth rate is better than 53.07% of 765 companies in the Travel & Leisure industry. Its 3-year average EBITDA growth rate is 6.5%, ranking better than 53.71% of 607 companies in the Travel & Leisure industry.
ROIC vs WACC
Another way to determine a company's profitability is to compare its return on invested capital (ROIC) to the weighted average cost of capital (WACC). The ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. The WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Hilton Worldwide Holdings' ROIC is 11.43, and its cost of capital is 9.82.
Conclusion
In conclusion, Hilton Worldwide Holdings (HLT, Financial) stock appears to be modestly undervalued. The company's financial condition is poor, but its profitability is fair, and its growth ranks better than 53.71% of 607 companies in the Travel & Leisure industry. To learn more about Hilton Worldwide Holdings stock, you can check out its 30-Year Financials here.
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