My Buy investment rating for Wyndham Hotels & Resorts, Inc. (NYSE:WH) shares stays unchanged.
In my previous October 17, 2022 write-up for Wyndham Hotels, I previewed WH’s third quarter financial results and assessed the company’s approach towards acquisitions. I discuss about what makes Wyndham Hotels an appealing investment proposition in the current update.
WH is currently valued by the market a relatively lower forward EV/EBITDA multiple as compared to its key hospitality peers, and I don’t think this is justified. Wyndham Hotels’ growth outlook is promising, and the company’s financial performance has been more resilient than its peers in the past major economic crisis. This is why I am of the view that WH warrants a higher valuation multiple and a Buy rating.
Favorable Demand-Supply Dynamics
New hotel supply growth should be relatively modest in the short term, according to a Raymond James (RJF) research report (not publicly available) titled “U.S. Hotel Supply Update, Year-End 2022” published on December 29, 2022. In this report, RJF cited data from Lodging Econometrics suggesting that the expected new hotel supply growth rates for 2023 and 2024 are 1.3% and 1.4%, respectively. In comparison, the annual new hotel supply growth rate was around 2% on average in the past.
Separately, hospitality industry data provider STR forecasts that the U.S. hotel industry will see a very moderate +1.1% increase in supply for this year. Furthermore, STR’s projections point to a +2.8% growth in U.S. hotel demand in 2023. Taking into account expectations of demand growth exceeding supply growth in the current year, STR predicts that U.S. hotels as a whole should be able to deliver positive RevPAR (Revenue Per Available Room) growth for 2023, notwithstanding a weak macroeconomic environment.
As such, investors will do well to consider adding hospitality stocks to their portfolios, given the favorable demand-supply dynamics for the U.S. hotel market. In my opinion, Wyndham Hotels is the top pick among hospitality names due to its good mix of defensiveness and growth.
WH is the best defensive pick among U.S. hospitality stocks. As highlighted in its investor presentation slides, select-service hotels account for approximately 99% of Wyndham Hotels’ portfolio. In contrast, peers such as Hilton Worldwide Holdings (HLT) and Marriott International (MAR) have select-service hotels representing 57% and 29% of their respective portfolios, which implies that they have a larger exposure to full-service hotels.
Wyndham Hotels’ historical numbers and recent management commentary support my thesis that WH is pretty defensive in tough times.
The company disclosed in its investor presentation that its select-service hotels saw a -14% drop in RevPAR during the 2008-2009 Global Financial Crisis, and this was equivalent to a +5 percentage points outperformance vis-a-vis upscale industry peers. Based on data drawn from S&P Capital IQ, Hilton Worldwide Holdings, which has a relatively lower exposure to select-service hotels as indicated earlier, Wyndham Hotels & Resorts, Inc. saw its RevPAR fall by close to -20% in 2009.
At its most recent Q3 2022 results briefing, WH also stressed that “demand continues to accelerate with this mid-income, mid-scale consumer that stays in our hotels.” This suggests that economic weakness has had a muted impact on the demand for Wyndham Hotels’ portfolio of select-service hotels thus far.
Wyndham is entering an accelerated phase of growth in the coming years. Historically, WH has achieved net room growth in the +1%-2% range. Looking forward, I see Wyndham Hotels’ annual net room growth rising to the +3%-4% level for 2023 and beyond.
My bullish forecast for WH is supported by its good performance in the third quarter of 2022 and the company’s sound growth strategies.
In Q3 2022, Wyndham Hotels registered an impressive +4% net room growth, and its hotel development pipeline also expanded by +10% as compared to a year ago.
Wyndham Hotels’ future net room growth is expected to be driven by both organic and inorganic means. In my prior mid-October 2022 article, I highlighted my positive views about WH’s “focus on complementary and value-accretive bolt-on acquisitions,” which includes the recent Vienna House deal.
Separately, WH’s organic growth strategy revolves around the expansion of its hotel portfolio with the introduction of new brands. These include Wyndham Alltra and Registry Collection, which were launched in recent times.
Valuation Discount To Peers Should Narrow Over Time
The market is now valuing Wyndham Hotels at 12.7 times consensus forward next twelve months’ EV/EBITDA as per S&P Capital IQ’s valuation data. As a comparison, WH’s peers, Marriott International, Choice Hotels International, and Hilton Worldwide are currently trading at consensus forward next twelve months’ EV/EBITDA multiples of 13.6 times, 13.8 times, and 15.1 times, respectively.
I believe that Wyndham is in a good position to narrow the valuation gap with its peers. As economic conditions become more challenging, investors will have a better appreciation of companies which are more resilient and are still able to generate strong growth like WH.
I decide to retain my Buy rating for Wyndham Hotels. There is a mismatch between WH’s current valuations and its defensive & growth attributes. Therefore, my opinion is that Wyndham Hotels’ valuations should play catch-up with its peers in times to come.
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