InterContinental Hotels Maintains Solid Positioning With Reasonable Stock Price (NYSE:IHG)

InterContinental Hotels Group PLC (NYSE:IHG) has seen hammered growth in the last two years. But now, it continues to fire up with its solid revenues and margins. Its impeccable performance may continue as market trends appear more optimistic. Travel trends are bouncing back to 2019 levels despite inflationary headwinds.

Moreover, it has the adequate financial capacity to sustain its operations and cover borrowings. It can expand further to seize rosy market opportunities with its stable cash levels. Dividend payments have already resumed with reasonable yields. They remain well-covered as the company generates more returns.

Likewise, the stock price shows enticing upside potential. It has potential undervaluation, which can be an ideal entry point to buy stocks.

Company Performance

InterContinental Hotels Group PLC has faced massive disruptions in the last two years. Pandemic restrictions limited the operations, leading to lower revenues. The Omicron fears and the geopolitical tension in Europe led to more challenges. Today, inflationary headwinds are testing the financial stability of the company.

Despite all these, IHG shows its capacity to maneuver itself with prudence in a rugged market. It proves its resilience and durability as it gradually regains its footing. With the easing of restrictions and business rebounds across regions, leisure and business travel is increasing. IHG shows an impeccable rebound in all its markets except Greater China due to another surge of infections. Overall, the upward momentum of the company is evident.

Its operating revenue reached 1.38 GBP in the first half, a 64% year-over-year increase. Indeed, revenge travel offsets the impact of the rising prices. There may be changes in itineraries, but people are willing to spend as much as they spent in 2021. Most Millennials and Gen Zers say inflation strains their travel budget, but they still plan to travel. We can also attribute this increase to the continued hotel reopenings. IHG continues to seize the opportunity as travel fires up. Also, it has an ideal business model. It is composed of leases and fee-based models. Its fee segment is agile since it can adjust its room rates to price increases.

This half-year, I expect more impressive results despite mixed market results. The UK saw inflation peak at 11.1%, but the drop to 10.7% recently may convey economic stability. Meanwhile, the US and Canada have an optimistic outlook as their inflation continues to lull. Also, seasonality makes revenge travel more robust in the second half. The biggest problem I see is the intense lockdowns in China as Covid-19 infections surge. It may have a weaker performance in the area in 4Q 2022 and 1Q 2022. Note that it comprises 12% of the total hotels of the company. Even so, it may be offset by the solid growth in the Americas and EMEAA. I also believe fuel prices may stabilize in 2023, leading to a steadier performance.

Moreover, we can observe its continued rebound to 2019 levels. The 3Q RevPAR of $86.83 is 16% higher than in 3Q 2019. I expect it to increase, since revenge travel has yet to unleash its potential. Inflation and restrictions in certain areas are hampering its upside potential. I will discuss more of it in the next section.

With regard to its peers, IHG remains an excellent company to watch. It holds a market share of 5.9%, a noticeable improvement from 5% in the comparative quarter. Its revenue growth is way above the peer average of 39%. Indeed, it continues to grow faster than most of its peers.

What makes IHG even more impressive is its ability to manage costs and expenses. Their increase is proportionate to revenues despite the inflation. With that, IHG stays viable. Its operating margin of 21.1% is higher than the peer average of 21%. It is also better than larger hotels like Marriott (MAR) with 17.8%, Hyatt (H) with 10.2%, and Accor (OTCPK:ACRFF) with 7.2%. The results of IHG’s hotel expansion, revenge travel, China’s lockdown, and inflation may be mixed. To be more conservative, I estimate margins to be almost the same. But it may be lower at 20% than in the comparative half-year.

How InterContinental Hotels Group PLC May Stay Durable

Inflation, mainly fuel prices, can deter hotel industry growth. But the views of many individuals about revenge travel are optimistic. The plan to lodge away from home in 4Q 2022 and 1Q 2023 holidays is 2.9% higher than in 2021. Changes in itineraries are their best option to cope with the higher fares and fuel prices. Millennials are more optimistic about travel. Among the respondents, 14% have New Year Travel plans versus 12% in the previous year. They also have adequate finances since the unemployment rate remains low and stable. It supports the increase in occupancy rates and levels. In turn, the company seizes this opportunity by raising rates and reopening more hotels. Currently, it has 6,051 hotels versus 6,031 hotels in the comparative quarter.

Even better, American and British travel plans seem hotter than in 2020 and 2021. In a survey, 96% of people plan to take at least one trip this 2023. The same study shows that 37% of people will spend more on travel, while 43% will spend the same next year. Relaxation, quality time with family, going away from home, and a change in scenery are their primary motivations. The UK also has optimistic travel outlooks. Based on the recent survey, estimations show that travel spending may amount to 29.5 billion GBP. It is higher than in 2019 and 2022 by 4% and 14%, respectively. Indeed, the hotel and accommodation industry sees more enticing growth prospects. It can allow them to raise their rates as they open more hotels and rooms.

Another proof of maintained purchasing power is the changes in travel preferences. Europe and Asia-Pacific are drawing a vigorous travel interest. It is consistent with the recent data about flight searches. International flight searches are rising to 62% versus 38% of domestic searches.

But again, IHG must beware of Greater China’s lockdowns. I don’t want to downgrade its potential impact since China is also a primary market. If policymakers fail to contain it, other markets may be affected. The vaccination continues, but its capacity to keep the threats at bay remains to be seen. The substantial rebound in the Americas, Europe, and the Middle East, may hopefully offset the changes in East Asia.

The core strength of IHG lies in the stable fundamentals. Cash and cash equivalents keep increasing, showing increased returns. Meanwhile, borrowings remain relatively stable, which is advantageous to its liquidity. It has a Net Debt/EBITDA of 2.5x, which is way lower than the maximum level of 3.5-4.5x. IHG is also a capital-intensive company, since it has many hotels under its management. The company earns enough from its core operations to cover borrowings. We can confirm it in its stable cash inflows, which are more than enough to cover CapEx. These show that IHG has more than enough cash reserves to sustain its operations despite market changes. It remains viable, liquid, and sustainable.

Stock Price Assessment

The stock price of InterContinental Hotels Group PLC has rebounded after its sharp dip. But the decreasing trend is still more evident. At $58.48, it has already been cut by 10% from the starting price. It may be an ideal price for investors. The price-earnings multiple 24x agrees with it. If we multiply it by my estimated annual EPS of $2.5, the target price will be $62.24. Meanwhile, NASDAQ has a more optimistic estimation of $2.79, with $69.44 as the target price.

Dividend payments have already resumed after the pause in the last two years. It may be sustained with more robust performance and an optimistic market outlook. Also, it has a dividend yield of 2.24%, which appears reasonable. It remains well-covered, given the dividend payout ratio of 41%. To assess the stock price better, we will use the DCF Model.

FCFF 455,000,000 GBP

Cash 1,120,000,000 GBP

Borrowings 2,500,000,000 GBP

Perpetual Growth Rate 5%

WACC 9.2%

Common Shares Outstanding 184,018,000

Stock Price $58.48

Derived Value 53.99 GBP or $64.92

The derived value agrees with the PE multiple estimates, showing potential undervaluation. The EV Model (11.67B-1.38 B)/ 184,018,000 shares also agrees with a target price of $67.24. So there may be an 11-14% upside in the next 12-18 months. The current stock price of the company appears to be a good bargain. As such, potential investors may consider this an ideal entry point to buy.

Bottom Line

InterContinental Hotels Group PLC shows an impressive rebound with robust upside potential. Its Balance Sheet shows its solid positioning against market headwinds. It has the adequate financial capacity to cover its operations during a market contraction. Also, the stock price shows potential undervaluation, making it an entry point. The recommendation is that InterContinental Hotels Group PLC is a buy.