Hyatt: Long-Term Demand, Room Growth, and Cash Flow Expansion Remain on Horizon

Hyatt Hotels’ H investor day highlighted the company’s ongoing asset-light transformation, positive secular travel trends, and unique positioning, which we believe will support healthy financial results and its brand intangible asset—the source of its narrow moat. We plan to increase our $120 fair value estimate by a low-single-digit percentage to account for a working capital adjustment in 2023, leaving the shares undervalued.

Hyatt’s asset-light transformation (representing of 75% of total EBITDA in 2022, up from 47% in 2017) is pushing higher returns on investment capital (from 9% in 2017 to an estimated high 20s by 2027) and free cash flow (17-percentage-point conversion rate increase since 2017). This has driven more capital to allocate toward the business, shareholder returns, and obtaining investment-grade status. Since 2017, Hyatt’s asset sales have averaged a 16 times adjusted EBITDA multiple and have been recycled into acquisitions (Miraval, Two Roads, and Apple Leisure Group) that have generated 2 times the amount of earnings of those hotels sold.

The company stands to benefit from existing industry tailwinds like the desire for experiences and remote work flexibility. As a result, it sees 2024-25 revenue per available room growth of 3%-7% (versus our 4%-5% forecast), 6%-7% unit growth (in line with our expectation), and free cash flow in 2025 of $750 million (we expect $800 million). We think Hyatt is uniquely positioned to post industry-leading room growth for the next decade. This view is framed by its room pipeline representing 38% of its existing base and its portfolio averaging just 4 rooms per U.S. market versus 14 for narrow-moat peers Marriott, Hilton, and InterContinental. One brand to help Hyatt expand into underserved interstate and small-town markets is the new upper-midscale extended-stay Studios, which already has 100 letters of intent. We plan to maintain our 5% average annual room growth forecast for 2023-32.