Should You Book This Investment?

Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Hyatt Hotels (NYSE: H) has 492 properties spread out over six continents, so its got geographic diversification covered. On the other hand, there are several reasons why it might not be an ideal investment right now. Let's look at both sides of the argument and see which side is best.

A quality operation

One thing that is indisputable is Hyatt is a high-quality operation. For instance, Hyatt has won several industry awards.

In 2012, The Guardian and Observer rated Hyatt “Best Overseas Hotel” for its Travel Awards. The Chicago Tribune also rated Hyatt as a “Top 100 Workplace in Chicago (#2 for large companies).” And Hyatt received a “Great Workplace Award” from Gallup.

Sticking with the workplace theme, the company culture at Hyatt is strong. This, in turn, often leads to increased production.

According to Glassdoor.com, employees have rated their employer a 3.6 of 5, 76% of employees would recommend the company to a friend, and 89% of employees approve of CEO Mark Hoplamazian. The only consistent negative was favoritism, but this is normal for a large company. Most other review comments were positive in nature. Very similar results and comments were reported from some of its competition.

Hyatt vs. peers

Hyatt has seen revenue and earnings improve for three consecutive years. At the same time, it proved to be highly susceptible to an economic downturn when revenue declined substantially in 2009 and the company reported a loss. Therefore, this is far from a resilient play. If the economy suffers, then Hyatt, Marriott International (NYSE: MAR), and Starwood Hotels & Resorts (NYSE: HOT) will all suffer with it.

If you’re not concerned about the direction of the broader market, and you simply want to invest in a quality operation, then all three of the aforementioned companies qualify as good candidates.

As far as Hyatt is concerned, it’s a bit riskier than its peers, partially because it owns most of its properties opposed to franchising them out. This leads to higher costs and lower margins. The same can be said for Starwood Hotels & Resorts, but at least it currently offers a better value (more on that soon). Marriott, on the other hand, franchises most of its properties, which is why its margins are so impressive.

For example, Marriott owns a profit margin of 24.26%, whereas Starwood sports a profit margin of 17.67%, and Hyatt’s profit margin is roughly 3.50%. That said, Marriott’s revenue declined in 2012, whereas Hyatt and Starwood have been steady on the top-line.

The biggest fundamental negative for Hyatt is that it’s trading at a lofty 81 times earnings, whereas Marriott and Starwood are trading at 22 and 20 times earnings, respectively.

Growth

Hyatt is very good at growing at a steady pace. For instance, while Marriott and Starwood are looking to expand aggressively in Africa, Hyatt only has two high-end hotels in development, which would total eight hotels on the continent. And Hyatt is focusing on areas that cater to Chinese business travelers.

Though Marriott and Starwood might be correct in their assessment of future growth potential in Africa, there are risks, including political corruption, war, crime, and disease. Perhaps rising exports and urbanization can alter the landscape, but it’s doubtful that travelers will ever feel as safe in Africa as they do in the United States or Europe.

This will limit growth potential, simply because many families will opt for a safer vacation. The current dilemma is that growth has slowed in Europe and the United States, so a move to the high-growth Africa region looks to present a compensating opportunity.

Looking at Hyatt specifically, it has recently opened several properties -- all strategically located. One property opened in Gurgaon, India. This property sits on six acres, it offers 40,000 square feet of meeting and event space, it’s close to major attractions, and it’s only 30 minutes from the airport. Hyatt also recently opened its Atlanta Midtown location, which is set right in the heart of Midtown Mile.

Additionally, Hyatt formed a partnership with MGM Resorts. With this agreement, Hyatt Gold Passport members will earn and redeem points at MGM Resorts properties in Las Vegas, and MGM Resorts M Life members will earn M Life points when they stay at Hyatt properties. 

Conclusion

Hyatt might be a quality long-term investment, but due to the industry’s highly cyclical nature, these stocks aren’t steady winners. They tend to boom during good times and crash during bad times. Resiliency is a foreign word when you’re investing in this industry.

Though Hyatt might have more room to run, it’s trading at 81 times earnings, which makes it high risk, especially considering the questionable status of the global consumer. On the other hand, Hyatt is a quality company. If you choose to invest, you should feel good about investing in a best in class hotel business.

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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