Should You Pick Hyatt Over Vail?
Since January, Vail Resorts stock (NYSE: MTN) has declined by just 6% as compared to Hyatt Hotels stock (NYSE: H), which is down by 40%. Considering the current stock price, Hyatt and Vail are trading at a trailing P/S multiple of 1 and 4, respectively. Implying, an investor will have to pay $228 for Vail resorts’ $57 in sales/share as compared to $52 for Hyatt Hotels’ $52 in sales/share. Is it warranted? The price-to-sales, or P/S, multiple for a company is higher when sales growth is higher, and it demonstrates the ability to consistently translate those sales to profits. We believe that Vail Resorts’ current P/S multiple of 4 looks expensive considering the systemic risk faced by the overall travel & tourism industry due to the pandemic. Also MTN’s P/S multiple is down by just 10% as compared to Hyatt’s P/S multiple, which has dropped by 45% since January.
In the past three years, Vail’s revenues have grown by 21% whereas Hyatt’s top line has expanded by just 11%. This can largely be attributed to Vail’s larger focus on mountaineering-related services including ski school, mountain biking, and hiking over lodging. In fact, the company generates 86% of total revenues from the Mountain segment. On the contrary, Hyatt is primarily a hospitality company with a greater focus on luxury and upscale markets. Despite higher revenues, Hyatt’s market capitalization is lower than Vail largely due to lower free cash flow generation capabilities. In 2019, Hyatt and Vail’s free cash flow margin was 8% and 13%, respectively.
Our dashboard Hyatt Hotels vs. Vail Resorts: Is H Stock Appropriately Valued Given Its Significantly Lower P/S Multiple Compared to MTN? details the fuller picture based on Revenue Growth, Returns (ability to generate profits from growth), and Risk (sustainability of profits), parts of which are summarized below.
1. Revenue Growth
Vail’s growth has been consistently stronger than Hyatt’s over the last three years, with Vail’s Revenues expanding at an average rate of 13% per year from $1.6 billion in 2016, to $2.3 billion in 2019, versus Hyatt’s Revenue growth of 5.4%.
- Vail’s top-line expansion has been fueled by a series of acquisitions which has consequently led to a surge in skier visits. The number of people visiting Vail’s mountain resorts utilizing a ticket is recorded as skier visits.
- The low-interest-rate environment following Covid-19 has made investors take a longer-term view, valuing higher growth companies more richly. And this largely explains the recovery in Vail Resorts stock in the past few months. For perspective, Vail’s stock has surged by 74% since the lows in March as compared to 43% growth in Hyatt stock.
2. Returns (Profits)
Coming to Returns, Vail has an edge over Hyatt, supported by a higher operating margin and a stronger top line growth.
- Vail’s Free Cash Flow as a percentage of revenue stood at about 12.6% in 2019, slightly higher than Hyatt’s 7.9% over the same period.
- However, both companies’ Return on Invested Capital has been similar in the past two years.
Considering financial leverage, Hyatt looks like a riskier bet despite the company’s asset-light strategy focusing on boosting franchise business and liquidating owned & leased properties.
- In 2019, Hyatt Hotels and Vail Resorts’ debt-to-equity ratio stood at 17.2 and 14.9, respectively.
- That said, Hyatt and Vail have sufficient liquidity to service their long-term debt obligations and fund operations for more than a year per the previous earnings report.
- Vail Resorts looks overvalued considering the current P/S multiple of 4, which is just 10% lower than observed in January. In comparison, Hyatt, Hilton, and Marriott’s P/S multiple have dropped by 45%, 25%, and 40%, respectively.
Though Vail’s sales growth is higher, a lower drop in price-to-sales multiple compared to peers Hyatt, Hilton, and Marriott may, in fact, be a downside indicator for the stock as the prolonged slump in travel demand is likely to weigh on the overall travel and tourism industry for some time. For Hyatt, the company is going through a transformation phase with a focus on asset-light growth and continuous expansion of its brand portfolio. Revenue growth for the company has remained low, but its room portfolio has expanded by 30% since 2016 as compared to 22% for Vail Resorts. A rebound in travel demand hinges on the pandemic and the decision by governments to lift restrictive measures. Interestingly, the asset-light business models of Hyatt and Vail are a boon during the times of crisis as it limits operating losses. Thus, the discovery of a successful vaccine in the coming months should push all hotel stocks higher along with a rebound in discretionary spending.
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