Marriott vs. Hyatt: Which Hotel Stock to Serve Better Returns?

The hotel space primarily thrives on consumer spending. The near-term fate of the overall industry reflects increasing anxiety among consumers regarding Trump’s tariff policy. Large companies, with overseas markets and supply chains, are likely to face the brunt of the ongoing trade spat.

However, steady rise in wages, lower unemployment and upbeat consumer confidence indicate that hotel stocks may be able to survive the trade turmoil. Per the second estimate by the Bureau of Economic Analysis, gross domestic product (GDP) increased at an annualized rate of 4.2% in the second quarter compared with 2.2% growth in the first quarter. Meanwhile, Federal Reserve raised its outlook on U.S. economic growth. The median of real GDP forecast increased from 2.7% to 2.8% for the current year.

The momentum in the U.S. hotel industry continues in 2018, after moderate growth in 2017. In first-quarter 2018, the industry witnessed better-than-expected rise in demand, with revenue per available room (RevPAR) increasing 3.5%, per CBRE Hotels’ Americas Research. CBRE also anticipates a 2.8% increase in RevPAR for the current year on the back of a 0.1% increase in occupancy and 2.7% rise in average daily rate (ADR).

Hotel bigwigs, including Marriott International, Inc. MAR and Hyatt Hotels Corporation H, may benefit from hotel demands that support increases in both occupancy and ADR. With the companies currently carrying a Zacks Rank #3 (Hold), let’s find out which is placed better, with respect to other parameters.

Price Performance, Earnings History & Growth Projection

While the Zacks Hotels and MotelsIndustry has rallied 1.4% in the past year, Marriott and Hyatt have gained a respective 22.8% and 28.2%, outpacing peers.

           1-Year Price Performance

Both Marriott and Hyatt beat earnings in each of the last four quarters. While Marriott has an average positive earnings surprise of 14.7%, Hyatt’s average is 34.5%.

However, the consensus estimate calls for 10.7% year-over-year fall in Hyatt’s current-year earnings while Marriott’s 2018 earnings are projected to increase 35.1%.

Valuation & Debt Ratio

Since hotel stocks are debt-laden, it makes sense to value those based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric considers not just its equity but also the level of debt on a company’s balance sheet.

For capital-intensive companies, the EV/EBITDA is a better valuation metric because it is unaffected by changing capital structures and ignores effects of non-cash expenses on a company’s value. The trailing 12-month EV/EBITDA ratio of Marriott is 17.93 while that of Hyatt is 27.77. With the industry average being 14.99x, Marriott has an edge over Hyatt.

Since the sector has high financial leverage, the debt-to-asset ratio comes into the picture. This measures the ability of a company to meet its long-term debt. Hotel stocks should ideally have lower debt ratios, implying a higher proportion of assets over the long term. Hyatt’s debt ratio is 19.7 compared with the industry’s 44.6 and Marriott’s 37.7.

Return on Equity & Net Margin

Marriott delivered return on equity (ROE) of 52.8% in the trailing 12 months compared with the industry’s increase of 6.6%. Hyatt’s ROE is 4.9%. This indicates that Marriott reinvests more efficiently than Hyatt.

Traditionally, gross margin for hospitality companies is comparatively higher as the majority of expenses come from the cost of operations. However, the sector’s profits are not very high, which is evident from the net profit margin or net margin. The industry’s trailing 12-month net margin is 8% while that of Hyatt’s and Marriott’s is 12.8% and 7.3%, respectively.

Final Thoughts

Notably, Marriott holds an edge over Hyatt when it comes to return on equity, valuation and projected EPS growth for the current fiscal. However, Hyatt’s past price performance, lower debt, higher margin and impressive earnings history remain encouraging. Please take a look at the following table to compare the two hotel giants.

  Source: https://www.zacks.com

Stocks to Consider

Two better-ranked stocks in the Consumer Discretionary sector include Callaway Golf ELY and Johnson Outdoors JOUT, each carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Callaway Golf and Johnson Outdoors’ earnings for 2018 are expected to increase 88.7% and 46.4%, respectively.

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