Financial Statement Analysis of Hilton Worldwide Holdings

Financial Statement Analysis of Hilton Worldwide Holdings Company Overview HiltonWorldwide Holdings Inc.is one of the largest and fastest growing hospitality companies in the world. The company is correctly positioned in the industry. We expect Hilton to grow at about 6.92% the same rate as its competitor and to maintain the median returns it currently generates. Hilton has relatively high profit margins while operating with median asset turns. Hiltons year-to-year change in revenues and earnings are better than that of its competitor. Hiltons revenue growth in recent years and current P/E ratio are both around their respective peer medians suggesting that historical performance and long-term growth expectations for the company are largely in sync. Analytical Conclusion Although the hospitality industry can get volatile Hilton Worldwide will continue to make strides as the company has a dedicated team coupled with an award winning portfolio and tailor made strategies for each hotel. Hence, the company will continue its operations for years to come. While Hilton has little control over external shocks, the company has the ability to adapt to its competitors, both old and new in all 104 countries and regions. Hilton worldwide is fairly valued. The company is currently valued at $19.07 billion with an anticipated value of $19.70-20B. Summary Financials Price (Sale):2.63(BV):3.21Float: 192.69M Debt to Equity: 184.85 52 Week Trading Range: 41.55 60.40Insider Holdings: N/A Current Ratio: 1.33 Cash: 1.42B Equity: 5.89 B P/E trailing: 54.77 Exchange: NYSEProfit Margin: 4.82% P/E forward: 27.65 Market Cap: 19.18BOperating Margin: 28.07% Shares Outstanding: 329.73MROE: 6.17% Selected Financials FY 12/31 2018 2017 2016 2015 2014 2013 2012 Revenue 9.66B 8.88B 11. 66B 11. 27B 10.50B 9.74B 9.28B Net Income 743M 571 M 348M 1.4B 673M 415M 352M EPS (Basic) 2.06 1.74 1.06 4.26 2.04 1.35 1.14 EPS (Diluted) 2.06 1.74 1.05 4.26 2.04 1.35 1.14 P/E 28.22 33.25 21.59 30.65 34.40 33.82 35.98 Company Highlights Net loss for the fourth quarter was $382 million, and net income for the full year was $364 million. Diluted loss per share was $1.17 for the fourth quarter, largely driven by $513 million of non-cash corporate restructuring charges incurred prior to the spin-offs, and diluted EPS was $1.05 for the full year. Added 354 hotels to its system in 2016, opening nearly one hotel per day in the year. Completed spins-offs of Hilton Grand Vacations (HGV) and Park Hotels and Resorts (PK) Hilton launched its newest brand the Tapestry Collection by Hilton. Description Hilton is one of the largest and fastest growing hospitality companies in the world, with a portfolio of 14 world class brands comprising over 4,900 properties with more than 800,000 rooms in 104 countries and regions. Hilton is committed to fulfilling its mission to be the worlds most hospitable company by delivering exceptional experiences at every hotel, to every guest, every time. Hilton was founded in 1919 by Conrad Hilton when he purchased his first hotel in Texas, Hiltons is the most recognized hotel brand in the world. Hiltons operate its business across three segments: ownership; management and franchise; and timeshare. Hiltons strategy focuses on providing service and cost models tailored to each hotel, reflecting size, business complexity, and market environment. Hilton provide appropriate levels of engagement depending on each hotels needs, by ensuring hotel owners are fully engaged in decision-making. This consolidated approach means Hilton maximize cost and scale effici encies, by sharing best practice, market and trend intelligence and ensuring appropriate affordability to each hotel. For example: Hilton refine its luxury brands to deliver products and service standards that are relevant to each region. Hiltons operations are mainly concentrated in the United States, however, it has its presence in the international markets such as in Europe, the Middle East and Africa, and in the Asia Pacific region. Operations Hilton operates its business across three segments namely; ownership, management and franchise, and timeshare. Ownership Hilton is one of the largest hotel owners in the world based on the number of rooms at the companys leased, owned and joint venture properties. Hiltons diverse global portfolio of owned and leased properties includes a number of prominent hotels in major cities such as New York City, San Francisco, London, Chicago, SÃ £o Paolo and Tokyo. Hiltons portfolio includes renowned hotels with significant underlying real estate value, by the end of 2016, the ownership segment had 141 hotels with 57,716 rooms. In recent years Hilton has expanded its hotel system less through real estate investment and more by increasing the number of management and franchise agreements the company has with third-party hotel owners. Hilton focuses on maximizing profitability and cost efficiency of all its portfolios by, reducing fixed costs and implementing new labor management practices and systems. For instance, Hilton has developed and executed strategic plans for each of its hotels to enhance the market po sition of each property. At many of its hotels Hilton has renovated guest rooms and public spaces and added or enhanced meeting and retail space to improve profitability. At certain of its hotels, Hilton is evaluating options for the adaptive reuse of all or a portion of the property to residential, retail or timeshare uses. Management and Franchise Hiltons management and franchise segment enables the company to manage timeshare properties and hotels and license its trademarks to franchisees. Hilton currently manages 4,734 hotels with 738,724 rooms. Therefore, this segment generates its revenue primarily from fees charged to homeowners, hotel owners and associations at timeshare properties. Hilton grows its management and franchise business by attracting owners to become a part of its system and participate in its brands and commercial services to support their hotel. On Hiltons part, these contracts require little or no capital investment to initiate and provide substantial return on investment for Hiltons. Hiltons primary management services consist of operating hotels under management contracts for the benefit of third parties, who either own or lease the hotels. Hilton earns an incentive fee based on gross operating profits and a management fee based on a percentage of the hotels gross revenue. For a fee Hilton franchise its trade, brand names, operating systems and service marks to hotel owners. Hilton does not directly participate in the daily operation or management of franchised hotels but its conducts periodic inspections to ensure that brand standards are maintained. Hilton approves certain aspects of development and the location for new construction of franchised hotels, in some cases, Hilton also provides the franchise with product improvement plans that must be completed in accordance with brand standards to remain in Hiltons hotel system. Timeshare Hiltons timeshare segment generates revenue from three primary sources: Resort Operations, Timeshare Sales, and Financing. Hilton market and sell timeshare interests owned by Hilton and third parties. The company sells timeshare intervals on behalf of third-party developers using the Hilton Grand Vacations brand. Through resort operations Hilton manages the Hilton Grand Vacations (HGV) Club, receiving annual dues, enrollment fees, and transaction fees from members. Hiltons also provides consumer financing, which includes interest income generated from the origination of consumer loans to customers to finance their purchase of timeshare intervals and revenue from servicing the loans. Strategy Since Hilton Worldwide was founded, the company has been among the top hospitality companies in the industry. In fact, after almost 100 years it is considered one of the largest and fastest growing corporations with the goal to deliver outstanding customer experiences and excellent operating performance. Hiltons business strategy is based on its service differentiation, the company distinguishes itself from its competitors by providing high quality service combining it with IT systems. According to Dudovki, (2016), Hilton has been focusing its strategy on digitalizing mobile services, booking channels, loyalty and data driven-personalization, and also improving guest experience and privacy. Enhanced service offering is at the forefront of Hilton strategy. In order to allocate more of customers travel spending to Hilton hotels, and consequently to enhance customer loyalty for the entire system of hotels and timeshare properties, the team created Hilton Honors Loyalty Program. The program rewards guests with points for each stay at any of Hiltons more than 4,900 hotels worldwide. Members can use the points earned for free hotel nights and other goods and services; moreover, it is possible to spend the points with 130 partners, among which car rental, rail, and airlines companies, credit card providers and others. The loyalty program contributed over $17 billion in terms of revenues as reported at the end of the year 2016. Another strategy employed by Hilton is premium pricing. Hilton utilizes the premium pricing policies for its upscale services and hotels. The pricing strategy is established to emphasize, among customers, the sense of status and luxury rather than the sense of stay and dining. Through the analysis of previous performance and strategies they provide to manage future profitability. For instance, they engage with sales teams for hotels with significant group/corporate business, to ensure corporate pricing structure is maximized throughout the RFP process. The management of Hilton believe every Hilton Worldwide property has its own unique strengths and challenges. As such they provide service and cost models tailored to each hotel, reflecting business complexity, size, and market environment. Hilton matches its service to the needs of the clients hotel, Hilton management believes that one size fits all. This consolidated approach means that Hilton maximize cost and scale efficiencies, rapidly sharing best practice, market and trend intelligence and ensuring appropriate affordability to each hotel. Hilton have focused on optimizing hotels market share and delivering market-beating revenue per available room (RevPAR) results. Hiltons team provides thorough analysis of previous performance and strategies to drive future profitability. Management Hilton Executive Committee is characterized by key personnel with diverse backgrounds who were able to bring the company to the prominence it now enjoys in the hospitality industry. Among those executive are Hiltons President and Chief Executive Officer, Christopher J. Nassetta. Nassetta has been one of the most important figure in the Hilton family since 2007. With a degree in finance, Nassetta has always been close to the hospitality industry and real estate market. In fact, he worked as President and Chief Executive Officer at Host Hotels Resorts, Inc. since 2000, and before he was Chief Development Officer for The Oliver Carr Company, one of the largest commercial real estate company in the Mid-Atlantic region. He is also involved in several non-profit organizations and volunteering. Another central leader in this profitable company is its Executive Vice President Chief Financial Officer, Kevin Jacobs. He began his experience at Hilton in 2008 covering various positions. He is now responsible of the companys global finance, information technology and real estate functions. As his President, Jacobs has a background in the hospitality industry working for other Hotels and Resorts corporations. Jim Holthouser joined Hilton board as Vice President of Global Brands in 1979. He directs the brand management and customer marketing across nine consumer brands for more than 4,000 hotels. With over 20 years of experience in the restaurant, lodging, and gaming industries, Holthouser has held a series of senior management positions within Hilton in the franchising, branding, and marketing arenas. The above mentioned key personnel are veterans in their own right with experience in hospitality and related industries, Hiltons executive team is well-positioned to accelerate its momentum. Hiltons executives collectively make a holistic team because they are from diverse background and shares common interests and values as such they all able to contribute to the holistic growth and development of Hilton Worldwide. Markets The hospitality industry is seasonal. It is common for Hilton and the other competitors to expect lower revenues in the first quarter of each year. According to Statista the global hotel industry in 2016 was valued at $490.06 billion. Reports by Financial Morningstar.com indicate that Hilton Worldwide is ranked among the largest player in the global hotel industry, Hilton and Marriott have the highest market share. They are followed by Wyndhams, Choice Hotels and International Hotels Groups. The global hotel industry is fragmented. There is no single company in a position to influence or dominate the industry as no company holds more than 5% of the global market shares. Hilton is growing quickly, as it has the highest global market share by room supply of approximately 4.7%. Hiltons operations are mainly concentrated in the United States, but it has started to increase its presence in the international market. Hilton has a higher market share of 9.3 % in the United States, it has a r elatively small share of 3% in other regions in the Middle East and Africa, 1.6 % in Europe, and 1.2 % in the Asia Pacific region. Hilton faces a strong competition as a hotel, resort, residential, and timeshare manager, franchisor, developer and owner. The hotel and lodging industry inspects several elements in terms of competition, such as the attractiveness of the facility, location, quality of accommodations, amenities, level of service, room rate, public and meeting spaces and other guest services, consistency of service, brand reputation and the ability to earn and redeem loyalty program points through a global system. Hilton principal competitors on a global scale are Marriott International, Accor S.A., Carlson Rezidor Group, MÃ ¶venpick Hotels and Resorts Hongkong and Shanghai Hotels, Hyatt Hotels Corporation, Intercontinental Hotel Group, and Wyndham Worldwide Corporation. Financial Analysis and Projections Financial History 2014-2015 Hilton Worldwide generates revenue from three business segments namely ownership, management and franchise and timeshare which accounts for the companys strong financial results. For fiscal year ending 2015 total revenue increased from $10,505,000,000 in 2014 to 1$1,272,000,000 in 2015, showing a growth of 6%. This positive revenue is attributed to recovery in the economy. Likewise, cost of revenue also increased from $4,029,000,000 in 2014 to $4,065,000,000. These cost of revenue are consistent with the companys portfolio expansion. However as a percentage revenues, cost of revenues decreased by 2% in 2015 which is a reflection of the companys extensive cost reducing strategy, meanwhile the companys gross profit margins increased by 2.27% in 2015. The companys selling and administrative, non-recurring, and other expenses as a percentage of revenues has shown slight increases over the past two years, which is consistent with expansions. However, the company was able to compress the cost of expenses so that these cost did not increase by more than the increase in revenues. On a per share basis, earnings showed a significant increase from $2.04 in 2014 to $4.26 in 2015, this represented an increase in performance. The companys net profit increased by 5.59% to 1,404,000,000 up from 673,000, 000, as Hilton launched its 13th brand, Tru by Hilton. Hiltons performance was as a result of the increase in revenues from owned and leased hotels in all segments and regions, with occupancy and rate increases in all regions except Middle East and Africa. Hiltons economic growth continued to drive performance, as global RevPAR increased from 3 to 5 percent. Hilton achieved record expansion and financial results in 2015 and continues to lead th e industry as the largest, best-performing and fastest-growing hospitality company. Fiscal Year ended 2016 The fiscal year ended 2016 was a record-breaking year for Hilton as the company increased its system size by 6.6% with 52,000 gross rooms opened, nearly one hotel per day was opened a total 354 hotels and started construction on nearly 77,000 rooms. The first quarter of the fiscal year 2016, was the slowest quarter for Hilton as they reported revenues of $2,750,000, 000, a 5% decrease over the corresponding period for 2015. The second quarter was the strongest quarter of the entire year, with a 9.9% revenue growth over the previous quarter. Revenues saw a consistent decline over the two last quarters. Net income for the first quarters of the 2016 was $ 309,000,000, a 48.5% increase over the corresponding period the previous year. However the company saw a significant reduction in net income over the three last quarters, and even posted a net loss in fourth quarter of 2016, the net loss was $382 million compared to net income of $816 million for the previous period in, 2015. During the fourth quarter of 2016, Hilton incurred a tax charge of $513 million related to a corporate restructuring executed before the spin-offs, resulting in a net loss for the period. For the fourth quarter of 2016, diluted loss per share was $1.17 compared to diluted earnings per share of $2.47 for the fourth quarter of 2015. For the fiscal year 2016, diluted EPS was $1.05 compared to $4.26 for the previous year. Net income was $364 million for the full year 2016 compared to $1,416 million for the fiscal year 2015, a 74% reduction. The companys performance for fiscal year 2016 reflect the effects of the spin-off of Park Hotels Resorts Inc. and Hilton Grand Vacations Inc. which was completed in January 2017. Consolidated Income Statement and Projections Common Size Expected Common Size Expected Common Size Actual Actual Actual All numbers in thousands Revenue 12/31/2018 12/31/2017 12/31/2016 12/31/2015 12/31/2014 Total Revenue 100% 9,661,440 100% 8,880,000 100% 11,663,000 11,272,000 10,502,000 Cost of Revenue 35.00% 3,381,504 35% 3,108,000 34.71% 4,048,000 4,065,000 4,019,000 Gross Profit 65.00% 6,279,936 65.00% 5,772,000 65.29% 7,615,000 7,207,000 6,483,000 Operating Expenses Selling General and Administrative 42.00% 4,057,805 40.00% 3,552,000 43.40% 5,062,000 4,741,000 4,182,000 Non-Recurring 0.09% 9,000 0.17% 15,000 0.13% 15,000 9,000 9,000 Others 5.88% 568,093 6.00% 532,800 5.88% 686,000 692,000 628,000 Total Operating Expenses Operating Income or Loss 1,645,039 1,672,200 1,861,000 2,071,000 1,673,000 Income from Continuing Operations Total Other Income/Expenses Net 4.50% 434,764.8 1.00% 88,800 0.15% -18,000 283,000 73,000 Earnings Before Interest and Taxes 21.53% 2,079,803 19.83% 1,761,000 15.79% 1,842,000 2,071,000 1,765,000 Interest Expense 5.00% 483072 5.00% 444,000 5.03% 587,000 575,000 618,000 Income Before Tax 13.00% 1,255,987.2 11.83% 1,050,600 10.76% 1,255,000 1,496,000 1,147,000 Income Tax Expense 5.00% 483072 5.00% 444,000 7.64% 891,000 80,000 465,000 Minority Interest 0.40% 38645.76 0.40% 35,520 0.43% 50,000 34,000 38,000 Net Income From Continuing Ops 8.00% 772,915.2 6.00% 532,800 3.05% 356,000 1,427,000 692,000 Net Income 7.60% 734269.44 6.43% 571,080 2.98% 348,000 1,404,000 673,000 Net Income Applicable To Common Shares 734,269.44 571,080 348,000 1,404,000 673,000 EPS Diluted 2.09 1.74 1.06 1.35 1.14 Average Share 350,000 329,000 329,730 1,040,000 590,350 Projections for Next Two years Current Fiscal year ending December 2017 As Hilton separate into three distinct, publicly traded company, in order to unlock growth opportunities and to take advantage of the capital market and tax efficiencies, there seems to be a dim outlook for the upcoming year. Experts project that revenues growth will decrease by 23.80% to 8.88 billion down from 11.66 billion in 2016. This expected decline in growth is not expected to translate in a reduction in overall EPS, as EPS, are expected to increase from $1.06 to $1.74. In fiscal 2017 the company plans to roll out its new simplified business model: A market leading fee-based business as over 90% of Hiltons revenue comes from franchise fee and management fee. This new business model is expected to generate significant revenues as the company continues to lead the industry in net unit growth without significant use of capital. Hilton intends to aggressively invest to drive revenues and manage risk. With the enhanced capabilities developed through the 354 hotels added in 2016 and the completion of a further 77,000 rooms. In addition, the company is expected to drive per unit growth due to the launch of its newest brand, Tapestry Collection by Hilton and extensive management contracts with large luxury hotels in countries such as China. However, general and administrative expense, non-recurring expenses and other expenses are projected to be flat compared to fiscal year 2016. Net profit is project to increase by 3.45% to 571,080 million. For the fiscal year ending December 2017, Hilton expects total revenue from continuing operations to increase by more than 20% up 88 million compared to the $18 million loss in 2016. Net unit growth is expected to be roughly 50,000 to 55,000 rooms as such system-wide RevPAR is projected to increase anywhere from 1 to 3 percent compared to 2016. For the fiscal year 2017 cash available for capital return and debt prepayments is projected to be between $900 million and $1 billion. Likewise, capital expenditures for the year, excluding amounts reimbursed by hotel owners, are estimated to be between $150 million and $200 million. Fiscal Year Ending December 2018 For the fiscal year ending December 2018, revenue are projected to increase by an average of 8.80 %, up to $9.67 billion, while earnings are expected to grow to an average of 2% to roughly $2.08 billion, showing positive prospects of continued growth. The earnings per shares are expected to show a corresponding increase from $1.74 to $2.08. Hilton is expected to drive leading investment returns to hotel owners, as hotel owners continue to invest in Hiltons system growth. Hilton is also expecting its market-leading growth to be amplified by its new brands that will bring new customers into its system and offers more opportunities for its existing customers to stay with the company. Capitalization and Other Asset and Liability Analysis During fiscal year 2016, in preparation for the spin-offs, Hilton entered into a series of financing transactions, of which the debt incurred by HGV and Park is the sole obligation of those entities after the spin-offs. Hilton entered into a $200 million senior secured term loan facility for HGV, the company also entered into a $750 million senior unsecured term loan facility for Park and issued two new commercial mortgage-backed securities (CMBS) loans for Park totaling $2 billion. The company also repaid $250 million on the senior secured term loan facility entered into in 2013. Finally the company borrowed $300 million on the revolving non-recourse timeshare financing receivables credit facility entered into in 2013 for HGV. Also during the fourth quarter of 2016, Hilton repaid the outstanding balance of $3,418 million on a CMBS loan entered into in 2013 and a $450 million mortgage loan, using net proceeds from 2016 borrowings and available cash. As of December 31, 2016, Hilton had $10.2 billion of long-term debt outstanding, of which $3.0 billion is transferred to Park and $0.5 billion is transferred to HGV in connection with the spin-offs. As of December 31, 2016, total cash and cash equivalents was $1,684 million, net receivables was $1.15 billion, inventory amounted to 541 million and other current assets was 176 million. In December 2016, Hilton paid a quarterly cash dividend of $0.07 per share on outstanding common shares, a total of $70 million, bringing total cash dividends paid in 2016 to $277 million. Hilton ended 2016 with property plant and equipment valued $8,930 million, goodwill of $5,822 million, intangible asset of $6,374 million, and other assets of $334 million the company also had deferred long term asset charge of 117 million. Hiltons total asset increased by 495 million to $26,211 million up from $25, 716 million in 2015. At the end of the 2016 the Hiltons had a working capital of $873 million, this indicates that the company has the ability to pay its short term liabilities. The current ratio is 1.33:1, which is also an indication of the companys ability to honor its short term obligations as they fall dues. Hiltons has $2,684 in total current liabilities, $20,312 million in total liabilities and total stockholders equity of $5,899 million and decrease of 52 million over the same pe riod in 2015. Projections indicate that along with Hilton s new simplifies business model and the separation of the three companies, the current capitalization structure Hilton should be profitable without the need for excess borrowing. Balance Sheet for year ended 31, December 2016 All numbers in thousands Current Assets $ Current Liabilities $ Cash And Cash Equivalents 1,684,000 Accounts Payable 2,513,000 Net Receivables 1,156,000 Short/Current Long Term Debt 171,000