We reestablished an investment in Hilton (HLT, Financial) in the fourth quarter of 2018 as the decline in the company’s share price provided us with an opportunity to once again own Hilton at an attractive valuation. We previously owned a small investment in Hilton in 2016, but sold our stake as its share price appreciated rapidly during our accumulation period. Hilton is a high-quality, asset-light, high-margin business with significant growth potential led by a superb management team.
We believe that Hilton has a unique competitive moat: its large and growing network of brands and properties offers a robust self-reinforcing value proposition for both guests and hotel owners. For guests, Hilton provides a consistent and reliable experience in a large variety of destinations at diverse price points, as well as an attractive loyalty program with enhanced awards, amenities, and customer service. For hotel owners, Hilton provides access to its more than 85 million loyalty program members, large-scale marketing programs, best-in-class reservation and IT systems, and supply chain purchasing power, which collectively allow hotel owners to achieve superior, above-market rates of return on capital.
Hilton’s robust value proposition for its franchisees and partners has allowed the company to expand its room count by 6% to 7% per year, a key driver of Hilton’s long-term growth. We believe that Hilton can maintain its current pace of unit growth over the long term as the company expands its international footprint with existing brands, continues to create new brands, and converts unbranded hotels to Hilton’s network of brands. Hilton’s current pipeline, more than half of which is under construction, amounts to 40% of its existing hotel rooms. In addition, secular growth in travel should underpin strong revenue per available room (“RevPAR”) growth (a measure of same-store sales for the lodging industry) over the longer term. While we expect RevPAR to remain positive over the coming years, unlike a typical hotel owner, Hilton’s fee-based, asset-light business model insulates the company from the outsized negative impact on profitability from potential short-term declines in RevPAR.
We believe Hilton can sustain attractive high-single-digit, top-line growth, which, coupled with cost-control and a robust share repurchase program, should allow it to compound earnings per share at a mid-teens growth rate for many years.
At present, Hilton trades at less than 23 times our estimate of 2019 earnings, a discount to its historical average, and below our estimate of the company’s intrinsic value based upon its high-quality, fee-based business model and strong future growth potential. We believe sustained execution by Hilton’s management team will demonstrate the durability of Hilton’s business model, which we believe is currently underappreciated by the market. Hilton’s share price, including dividends, declined 2% in 2018 from our initial average cost, but has returned 20% year-to-date.
From Bill Ackman (Trades, Portfolio)'s Pershing Square 2018 annual shareholder letter.
