Investors Reluctant to Check In Despite Hilton’s Perfect Sheets

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CORPORATE FOCUS

Investors Reluctant to Check In Despite Hilton’s Perfect Sheets

By ANDY FIXMER

Staff Reporter

After a three-year drought, business and professional groups are traveling again, giving a strong boost to the bottom line of Hilton Hotels Corp.

The Beverly Hills-based company reported a 39 percent jump in second quarter earnings, raised revenue projections for the full year and announced plans to increase its annual cash flow to $1 billion within three years, giving it room to pay down debt and possibly make more acquisitions.

Hilton is also benefiting from a surge in vacationers buying timeshares. Revenues at Hilton Grand Vacations Co., the company’s vacation home unit, rose 24 percent in the second quarter.

“There are all these things working for the company right now,” said Bill Crow, a Raymond James & Associates analyst who upped his recommendation to “strong buy” from “outperform.” “Their balance sheet is exactly where it needs to be.”

While the uptick has given analysts confidence in Hilton, investors haven’t followed the script.

On July 28, the day the results were reported, the stock fell slightly on heavy volume. Since then, it has fallen further, to $17.22 as of the Aug. 4 close, about 4 percent below where it was before reporting earnings. Compared with a six-year high of $19.12 set on July 23, Hilton’s stock was down about 10 percent.

Will Marks, managing director of JMP Securities, said that a general decline throughout the hospitality industry is largely responsible for the slide.

“Wall Street is nervous about possible terrorism acts at the Olympics and the Republican convention in New York,” he said. “Any attacks could hurt the hotel sector more than other areas.”

Another factor: low bookings in Chicago, where Hilton runs several large hotels near the convention center. “They are over-exposed in Chicago and it’s hurt them,” Marks said.

One sign of strength: revenue per available room, a key hotel industry indicator, jumped 8.3 percent year-over-year.

The increase in cash flow will give Hilton the opportunity to repurchase stock, increase its dividend (now paid at an annual rate of 8 cents a share) or make other moves. “That creates a lot of excitement,” Crow said. “It could allow them to acquire Hilton International,” a separate company that licenses its name from Hilton.

The travel rebound has given Hilton’s Embassy Suites, Doubletree and Hampton Inn brands a chance to shine. These brands, purchased for $4 billion in 1999, continue to account for much of the company’s new-room growth, Crow said.

Under a franchise model, developers build the hotels independently of the company and then bring on Hilton to manage them under one of its flags. By the end of the year, Hilton says it will bring up to 17,000 more rooms online.

Like many chains, Hilton is slowly getting out of owning properties and instead managing them under long-term contracts. There has been strong growth in management and franchise fees, which the company reported were up 10 percent in the second quarter compared with the year-ago period.

Slower growth has been seen at Hilton-owned hotels, which reported a 3 percent revenue increase for the three months ended June 30, compared with the like period a year ago. “Our revenue growth comes from our franchised business, primarily,” said Hilton spokeswoman Kathy Shepard. “It’s split between fees from increased (revenues) and new units.”

Crow also cited Hilton’s weaning of customers from booking rooms on discount Web sites, and instead with a lower price guarantee convincing guests to buy rooms off its own site. “The cheapest way to have people book a hotel room is through your own site,” he said. “It makes a big difference to be able to retrain consumers to go to your site first.”

(Last week, shares of Barry Diller’s IAC/Interactive Corp. fell sharply after the company, which owns the online travel site Expedia.com, said that hotel chains and airlines have cut back on the rooms and seats the sites are allowed to sell.)

Crow said he is also impressed with Hilton’s focus on adding amenities, such as copy centers and check-in kiosks, that appeal to business travelers, who on average pay 25 percent more than leisure travelers. Corporate account rates are generally a third higher than those paid by vacationers.

“We are benefiting from that planning we’ve had over the last several years,” Shepard said. “Business is coming back and the important segment of group travel and business travel is coming back.”

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