Stock Pick: Fresh off its IPO, Hilton Worldwide has analysts divided

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While Twitter got all the IPO attention late last year, another brand name company also listed around the same time and reaped a bigger reward.

On Dec. 11, Hilton Worldwide Inc. (NYSE: HLT), which owns several hotel chains, went public and brought in $2.34 billion. (Twitter made $1.82 billion, though its market cap is about $10 billion higher.) Like any IPO, it’s risky to get in on the first day and initial investors have had a bumpy ride over the last three months.

But now that the company has announced results for the first time—it revealed its fourth quarter numbers on Feb. 27—investors can begin figuring out where this company is headed long-term.

Its fourth quarter results were mixed, with earnings dropping 57% over the same time last year. The decline was mostly due to IPO-related expenses, said the company. If you remove the listing costs, earnings came in at 11 cents per share, which was still five cents below analyst expectations.

However, revenues hit $2.64 billion for the quarter—that did beat estimates—and net income for all of 2013 increased by 18% over 2012.

Although its numbers didn’t blow people away, Steven Kent, an analyst at Goldman Sachs, upgraded his rating from neutral to buy, because he now has a clearer picture of the company’s future.

He upgraded the stock for four reasons: all of Hilton’s free cash flow is going to pay down its debt; it’s increasing its “under appreciated” timeshare business; its shares have lagged its peers since the first day of trading and it’s a contrarian call.

Kent points out that the company makes about $700 million to $900 million in free cash flow a year and it has explained clearly how it will use that cash to pay down its debt. Other companies, such as Starwood and Hyatt, have been more inconsistent with its free cash flow plans, he wrote in a Mar. 3 report.

Right now, the company has one of the lowest percentages of buy ratings in the lodging space, with only 46% of analysts saying it’s a buy—Starwood has a 70% buy rating by contrast. Kent thinks that’s an advantage as there’s low expectations for the company. As performance picks up, the stock price will certainly rise. If you wait until analyst ratings are more in line with Hilton’s peers, though, then you might be too late.

The company is currently trading at $22.40, but Kent thinks shares could hit $26 over the next 12 months.

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