Hilton Worldwide Beats Q2 Earnings on Solid RevPAR, Ups View

Zacks

Virginia-based hotelier, Hilton Worldwide Holdings Inc. (HLT) posted solid second-quarter 2014 results as both earnings and revenues beat the Zacks Consensus Estimate. Robust performance across all regions, except the Middle East & Africa, aided the company’s results.

Adjusted earnings of 20 cents beat the Zacks Consensus Estimate of 19 cents by 5.3% and were up 23.5% year over year. The upside reflects an increase in occupancy and room rates worldwide. Earnings was at the higher end of the management guidance of 18 to 20 cents.

Revenues increased 12.1% year over year to $2.66 billion driven by an increase in revenues in all the segments and solid revenue per available room (RevPAR) growth. Further, the top line beat the Zacks Consensus Estimate of $2.63 billion by 33.5%.

Revenues in Detail

Management and franchise fees were $371 million in the second quarter of 2014, an increase of 14% year over year. Excluding certain one-time items, management and franchise fees on an organic basis increased 18% year over year.

Revenues from the ownership segment were $1.12 billion in the quarter, up 4% year over year.

Timeshare revenues were $276 million, up 6% year over year. The rise was mainly attributable to an $8 million increase in revenues from resort operations compared to the second quarter of 2013, as well as a $4 million increase in timeshare sales revenues, including a $3 million increase in revenues from sales of timeshare units developed by third parties.

RevPAR & Margins

In the second quarter, RevPAR for comparable system-wide properties grew 6.7%, driven by 4% rise in average daily rate (ADR) and 2% rise in occupancy. The company’s RevPAR in the quarter was higher than the guided range of 5.5–6.5%.

Comparable system-wide RevPAR was up 7.3% in the U.S. and was up 4.3% internationally. While the Europe and the Asia Pacific regions posted strong results, Middle East & Africa reported RevPAR decline as political turmoil affected tourism in the region.

Adjusted EBITDA increased 10% year over year to $651 million, driven by a rise in EBITDA in both the Ownership and Timeshare segments. Adjusted EBITDA margin was 37.3%, up 110 bps year over year.

Update on Hotel Rooms

Hilton opened 56 hotels in the second quarter of 2014 and achieved net unit growth of over 7,000 rooms. On May 16, 2014, Hilton forayed into Kazakhstan, thus expanding its presence to 93 countries and territories globally.

The company also launched its new brand Curio – A Collection by Hilton during the quarter. As of Jun 30, 2014, nine Curio properties were in the pipeline.

Third-Quarter 2014 Guidance

Hilton expects adjusted EPS to range within 15 to 17 cents.

The company expects system-wide RevPAR to increase between 5.5% and 7% on a comparable and currency neutral basis compared with the year-ago quarter. Further, adjusted EBITDA is expected to range between $610 million and $630 million. Management and franchise fees are expected to increase in the range of 10% to 12%.

Full-Year 2014 EPS and EBITDA Outlook Raised

The company expects adjusted EPS in the 67 to 70 cents range, up from the previous guidance of earnings in between 64 cents and 67 cents.

The company expects system-wide RevPAR to increase within 5.5–7% on a comparable and currency neutral basis, with ownership segment RevPAR expected to increase in the range of 4.5–6.5%.

Adjusted EBITDA is projected to be between $2.425 billion and $2.475 billion, up from the prior range of $2.415 to $2,465 billion. Timeshare segment’s adjusted EBITDA is expected between $315 million and $330 million.

Additionally, the company expects management and franchise fees to increase approximately 11–13%.

Further, capital expenditures (excluding Timeshare inventory) are expected to be around $350 million. The company also expects to add 35,000 to 40,000 rooms.

Our Take

Hilton is progressing well on the back of a growing North American business, steady international exposure and increasing market share. The increase in business and worldwide leisure travel trends are also the positives.

Hilton currently has a Zacks Rank #2 (Buy). Other stocks in the same sector that can be considered include Wyndham Worldwide Corporation (WYN), Intercontinental Hotels Group plc (IHG) and Marriott Vacations Worldwide Corp. (VAC). These carry the same Zacks Rank as Hilton.

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