Wyndham Hotels Stock: All Eyes On Inorganic Growth Strategy (NYSE:WH)

Elevator Pitch

I continue to assign a Buy rating to Wyndham Hotels & Resorts’ (NYSE:WH) stock.

I upgraded the investment rating for WH from a Hold to a Buy with my prior update published on August 1, 2022. Wyndham Hotels’ relative stock price performance following the publication of my article has been good. WH’s shares declined slightly by -2.1% since the beginning of August, as compared to the S&P 500’s -12.9% correction during the same time period.

In my earlier August 2022 piece, I did a review of Wyndham Hotels’ second-quarter financial results and also highlighted positive drivers for the stock such as “share repurchases and market share gains.” The focus of my latest article is WH’s inorganic growth strategy and the company’s Q3 2022 earnings preview.

I don’t see the need to change my investment rating for WH. An earnings miss for Wyndham Hotels is less probable, as analysts don’t have very high expectations of WH’s Q3 2022 financial performance. More importantly, WH has a sound M&A strategy, which bodes well for the company’s medium-to-long term growth outlook. Therefore, I decided to retain my Buy rating for Wyndham Hotels.

M&A Approach

Wyndham Hotels is clear about how the company intends to execute on its inorganic growth strategy, and WH’s most recently announced acquisition is something worth studying in greater detail.

WH outlined its approach to M&A at the company’s most recent Q2 2022 earnings briefing, and there are a couple of key points that investors should pay attention to. Firstly, Wyndham Hotels has a preference for acquiring “smaller regionals in the mid-scale select service or even upscale space.” Secondly, the company is seeking acquisition targets which are “complementary to our existing brand portfolio and geographic footprint.” Thirdly, a key M&A criteria for WH is that the transactions are “accretive from an earnings and a net room growth perspective.”

Seeking Alpha News reported on September 8, 2022 that Wyndham Hotels bought “the Vienna House brand from Germany-based HR Group for €44M.” This recent deal is aligned with WH’s acquisition strategy as highlighted above.

Vienna House’s hotels are in the mid-scale and upscale segments, which are the areas that WH is keen to expand in. Separately, the acquisition of Vienna House allows Wyndham Hotels to expand its presence in Europe, more specifically Germany which accounts for 70% of Vienna House’s hotel portfolio.

Also, Wyndham Hotels’ focus on “smaller regionals” as potential M&A targets implies that the company is pursuing more of a bolt-on acquisition strategy that is less risky and more likely to be successful. Vienna House is a company of modest size considering its portfolio of just 40 hotels, which suggests that post-deal integration shouldn’t be a major issue.

More importantly, acquisitions have a high probability of being accretive, if the acquirer doesn’t overpay. In the case of Vienna House, Wyndham’s purchase consideration of EUR44 million or $44 million is equivalent to a valuation of around $7,300 per key. In comparison, WH’s peer, Choice Hotels International (CHH) disclosed a recent acquisition in June 2022 which was done at a relatively higher $10,000 per key valuation.

In conclusion, I have a favorable opinion of WH’s inorganic growth strategy and approach.

Wyndham Third Quarter Financial Results Preview

WH will announce the company’s Q3 2022 earnings next week, on October 25, 2022.

The investment community’s expectations of Wyndham Hotels’ near-term financial performance are low, which implies there is a high probability of WH at least delivering in-line third-quarter earnings in the worst-case scenario.

Based on Wall Street analysts’ consensus financial forecasts sourced from S&P Capital IQ, WH’s top line and normalized earnings per share or EPS are projected to decrease by -18% and -11%, respectively on a YoY basis in Q3 2022. Furthermore, six of the nine sell-side analysts that have WH under their coverage chose to cut their respective third quarter bottom line estimates for the company.

I noted in my prior August 1, 2022 article for Wyndham Hotels that “pent-up travel demand” and the company’s focus on “leisure-focused, franchised select-service hotels” will allow WH to perform better than most of its other hospitality peers. I still hold the same views.

Valuations

The market is currently valuing Wyndham Hotels at a discount to its historical averages.

WH now trades at a consensus forward next twelve months’ EV/EBITDA multiple of 12.6 times as per S&P Capital IQ data, and this is lower than its three-year average forward EV/EBITDA ratio of 15.4 times.

Similarly, Wyndham Hotels’ current consensus forward next twelve months’ normalized P/E metric of 19.2 times is below its three-year mean forward P/E multiple of 25.1 times.

As such, I deem WH’s current valuations to be appealing.

Bottom Line

Wyndham Hotels deserves a Buy investment rating. WH’s valuations are attractive, and I have a positive opinion of the company’s growth prospects in the long run, taking into account its M&A strategy.