Tomsmith585
Elevator Pitch
My investment rating for Wyndham Hotels & Resorts’ (NYSE:WH) shares is a Buy.
I previously wrote an article for Wyndham Hotels focusing on WH’s brand conversions and the company’s growth in China that was published earlier on October 4, 2021.
In this update, I review WH’s recent quarterly financial results, and look at how the stock has performed this year thus far. In my opinion, a buying opportunity for Wyndham Hotels has emerged with worries about weak travel demand being a drag on WH’s shares.
I view WH’s guidance for continued share buybacks in the second half of the year and the company’s inorganic growth drivers (to capitalize on industry consolidation opportunities) for the medium to long term as key positives for the stock.
Good Performance By Wyndham Hotels In The Recent Quarter
Wyndham Hotels’ top line of $386 million for the second quarter of 2022 exceeded the Wall Street’s consensus revenue estimate of $359 million by +8%, while its Q2 2022 bottom line of $1.07 per share beat the market’s consensus earnings per share or EPS forecast of $0.94 by +14%.
Adjusted for the effects of foreign exchange, WH’s overall Revenue Per Available Room or RevPAR increased by +23% YoY to $44.28 in Q2 2022, and this was +3% higher than the company’s pre-COVID RevPAR for Q2 2019. At its Q2 2022 earnings briefing on July 27, 2022, Wyndham Hotels highlighted that its overall RevPAR “surpassed 2019 levels for the first time” in the recent quarter, given that “international recovery accelerated.” WH’s international RevPAR grew by +59% YoY (versus a +15% YoY improvement in domestic RevPAR) in Q2 2022, but its international RevPAR for the recent quarter was still -6% lower than pre-pandemic levels for the same quarter three years ago implying room for further recovery.
WH also emphasized at the company’s Q2 2022 investor call that “99% of our 9,000 hotels are now franchised limiting our exposure to (the inflationary pressure on) operating costs”, and this is reflected in Wyndham Hotels’ profit margins. According to financial data sourced from S&P Capital IQ, Wyndham Hotels’ operating profit margin expanded from 34.3% in the second quarter of 2019 to 41.0% in the most recent quarter.
Travel Demand Concerns Overdone
Even though Wyndham Hotels delivered above-expectations financial numbers in the second quarter of this year, the company’s shares have underperformed the broader market.
Year-to-date in 2022, WH’s shares were down by -22.6% as compared to a -13.9% correction for the S&P 500 during this period. In the past one month, Wyndham Hotels’ stock price rose by +4.1%, which paled in comparison with the S&P 500’s +8.2% increase.
In my view, the shares of Wyndham Hotels have done poorly, because of concerns that travel demand might be negatively impacted by weak economic growth. But there are three key mitigating factors that investors should pay attention to.
One key mitigating factor is that there is lots of pent-up travel demand due to the border restrictions that were put in place in the last few years as a result of the coronavirus pandemic. At the company’s second-quarter earnings call, WH cited consumer surveys suggesting that “over 70% of them are saying they want to travel the same or more than they did this time last year.”
Another key mitigating factor is that WH’s portfolio of hotels are relatively more resilient. In my December 4, 2020 initiation article for Wyndham Hotels, I noted that it boasts a “favorable revenue mix with a higher proportion of leisure-focused, franchised select-service hotels” whose demand will be less affected by a poor economic environment as compared to properties focused on premium business travel. Notably, Wyndham Hotels’ RevPAR only decreased by a modest -14% in 2009 during the Global Financial Crisis as mentioned at its Q2 results call.
The final mitigating factor is that WH has the ability to grow its room count to partially offset any decline in RevPAR. Wyndham Hotels guided at its Q2 2022 investor call that it is “well positioned to grow both our revenue and our EBITDA” even under challenging economic conditions, as “80% of our system additions would come from (brand) conversions.”
In conclusion, I think that concerns regarding the negative effects of weak travel demand on Wyndham Hotels’ future business outlook are overdone.
Spotlight On Share Repurchases And Market Share Gains
I have a positive view of Wyndham Hotel’s short-term and long-term prospects.
In the near-term, a sustained level of share buybacks should help to provide support for WH’s stock price. Wyndham Hotels revealed at its Q2 2022 investor call that it spent $142 million on share repurchases in the second quarter of the year, and mentioned that in Q2 it “opportunistically repurchased 3.5 times the first quarter amount.” More significantly, WH guided that “the Q2 run rate (for share buybacks) would be a reasonable assumption for” 2H 2022. This sends a strong signal to the market that the elevated share repurchases weren’t an one-off, and Wyndham Hotels has the intention to continue buying back its own shares aggressively in the second half of this year.
In the long run, WH is in a good position to expand the company’s market share via mergers & acquisitions. It is noteworthy that WH had indicated at the most recent quarterly earnings briefing that the company is “continuing to gain market share.” This implies that the process of industry consolidation in the hospitality market has already accelerated due to COVID-19 with the larger branded players like WH grabbing share (organically) at the expense of smaller competitors in tough times. Looking forward, Wyndham Hotels mentioned specifically that “smaller regionals in the mid-scale select service” operating in “high-growth markets” are its potential acquisition targets, as per the company’s comments at its second-quarter investor briefing.
Closing Thoughts
WH is a Buy. Wyndham Hotels’ stock fell more than the broader market in the 2022 year-to-date period, as investors became worried that WH’s future financial performance will suffer due to a larger-than-expected drop in travel demand. I think that these fears are overblown, which warrant a Bullish view and Buy rating for Wyndham Hotels.
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