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Hilton Worldwide Holdings Inc. (NYSE:HLT) shot up 6.3% on April 11, a gain of almost $1.5 billion, after buying out its Chinese investors.
To buy back about one-quarter of its equity, Hilton will do a secondary offering of 60 million shares at $73 each. HNA Group Co. had been under pressure from the Chinese government to sell, but will still pocket a profit of about $2 billion on a $6.5 billion investment it made just over a year ago.
Further gains in Hilton stock were expected April 12 with HLT opening at almost $82 per share (though it closed up just 0.43%).
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All this is great for China, but before you put out your buy orders on Hilton stock it might help to understand that hotel chains aren’t chains anymore. They’re branded franchises, and this has changed the nature of the game.
The Franchise Game
When hotels were chains, companies like Hilton owned the buildings. As franchises, building owners are under contracts they can renegotiate and get out of at each expiration.
This may be why some of your favorite hotels keep changing names. A Sheraton becomes a Hilton becomes a Holiday Inn becomes a Marriott, as hotel owners look to secure the best deal.
This puts hotel owners under pressure to perform for property owners, to find ways to squeeze out costs and hand them more profit. One way to do that is to cut commissions to the people selling the rooms, and they’re doing that — even for the big blocks sold to meeting planners for conventions.
The good news is that franchising is highly profitable. The bad news is that it’s both competitive and can result in choppy results.
Hilton, for instance, had net income of nearly $1.26 billion in 2017, on total revenue of $9.14 billion. That sounds great, but the company earned just $348 million in 2016, on revenue of nearly $7.38 billion.
For the quarter ending in March, due to be reported April 26, analysts expect net income of 48 cents per share on revenues of $2.28 billion. Sounds good, but the price to earnings ratio of 20.7 is based on 2017 earnings of $3.85 per share. And if you buy now, remember, you’re being diluted by that huge secondary that came in at $73 per share.
A Good Business
Despite this, hotels have been a very good investment over the last year. Shares in rival Marriott International Inc. (NYSE:MAR) are up 44% in the last year. With the recent gains on the HNA deal Hilton has nearly matched that, with a gain of over 39% since last April.