Since June 2021, the S&P 500 has delivered a total return of 74.9%. But one standout stock has nearly doubled the market – over the past five years, Hyatt Hotels has surged 139% to $193.68 per share. Its momentum hasn’t stopped as it’s also gained 27.4% in the last six months, beating the S&P by 19.4%.
Is there a buying opportunity in Hyatt Hotels, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Hyatt Hotels Will Underperform?
We’re happy investors have made money, but we’re cautious about Hyatt Hotels. Here are three reasons why there are better opportunities than H, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Hyatt Hotels grew its sales at a 36.4% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Hyatt Hotels has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 3.6%, below what we’d expect for a consumer discretionary business.
3. New Investments Bear Fruit as ROIC Jumps
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Over the last few years, Hyatt Hotels’s ROIC averaged 3.2 percentage point increases each year. This is a good sign, and we hope the company can continue improving.
Final Judgment
We see the value of companies helping consumers, but in the case of Hyatt Hotels, we’re out. With its shares topping the market in recent months, the stock trades at 50.5× forward P/E (or $193.68 per share). This valuation tells us a lot of optimism is priced in – we think other companies feature superior fundamentals at the moment. Let us point you toward the most dominant software business in the world.
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