Hyatt hotels corporation hcc nyse h valuation of equity meghan shevlin march 24 2014
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Hyatt Hotels Corporation “ HCC” (NYSE: H ) Valuation of Equity Meghan Shevlin March 24, 2014. HHC. Hyatt: global hospitality company engaged in management, franchising, ownership and development of Hyatt-branded hotels, resorts, residences

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Hyatt hotels corporation hcc nyse h valuation of equity meghan shevlin march 24 2014

Hyatt Hotels Corporation“HCC” (NYSE: H)Valuation of Equity Meghan ShevlinMarch 24, 2014


HHC

  • Hyatt: global hospitality company engaged in management, franchising, ownership and development of Hyatt-branded hotels, resorts, residences

  • Hotel industry still suffering from the recession

  • 61% Revenues from Room sales

  • Industry growth of 3.3% expected through 2018

  • Trading at $54.84 as of 3/23/2014


Industry comparables
Industry Comparables

  • Highly competitive industry with 21M rooms available

    • Hyatt owns over 500 properties (147,388 rooms) in 42 countries vs HOT & MAR (>340,000)

  • H NEA ($5,228) vs. MAR ($1,434)

  • H Profit Margin (8%) vs. MAR (25%) HOT (18%) IHG (18%)

  • NI H ($207M) vs. MAR ($626M)



Simple equity valuation
Simple Equity Valuation

  • To compute the value of the equity holders’ interest separately we subtract the value of the debt holders’ interest from the enterprise value


Equity valuation model
Equity Valuation Model

  • Risk of equity arises as a result of a risk of the enterprise and the leverage that debt offers to the equity holders

  • When we estimate cost of capital we assume stability of risk going forward so we assume a constant cost of capital in the future

  • Cost of capital is dependent on the leverage of the firm, to assume constant leverage is a huge assumption

    • We therefore use Analyst Forecasts as a shortcut to valuation



Forecast from valueline
Forecast from Valueline

  • Firm is not at a steady state at the horizon

  • 25.66% earnings growth rate not feasible in long-term

  • Negative RE suggests H is overpriced


Valuation using dividend discount model
Valuation using Dividend Discount Model

  • No dividends paid out

  • Projected future price (target price) of $55

  • Based solely on this valuation, sell


Valuation using residual income model
Valuation using Residual Income Model

  • Assumed growth rate of 3%


Valuation using residual income model1
Valuation using Residual Income Model

  • Return on equity=11.7%

  • 2019 EPS 2.66

  • Long term growth rate .5298


Sensitivity analysis
Sensitivity Analysis

Blue indicates a buy


Conclusion
Conclusion

  • Dividend discount model, residual earnings model and abnormal growth models require very strong assumption that the leverage is not going to change

  • Hyatt’s low profit margin may cause the negative RE

  • Hyatt is extremely overvalued



Sources
Sources

  • Hyatt Hotel Corporation Annual Report 2012

  • Hyatt Hotel Corporation Investor Fact Book 2012

  • Valuation for Financial and Accounting Professionals: A Guide to Valuation and Financial Statement Analysis, Easton, Sommers

  • www.nasdaq.com/symbol/h

  • www.yahoo.com