Similar to almost every company we follow, HOT has done a great job cutting costs to partially offset brutal revenue declines, of which 75% are permanent, according to the company. On the "less bad" thesis the stock, along with our universe, exploded off the March 9th lows. Stabilization is a powerful catalyst when stocks fall 75%. For HOT, two questions remain: How stable is stable and are their more legs to the stabilization thesis.
I get the stabilization thesis, the reflation thesis, the "less bad" thesis. Research Edge and my team were early on this call for consumer stocks. After listening to the HOT call and reviewing the lodging data, I don't see a near-term recovery scenario, and even the veracity of the stabilization call can be challenged. Consider the following comments by HOT's CEO from yesterday's call:
- "We are seeing signs everywhere that there is some stabilization. Occupancies worldwide appear to be stabilizing. However rate, which always lags, is still continuing to deteriorate. Transient trends feel firmer with more late-breaking business, while group business remains very soft....That said, all we are seeing is stabilization. There are no signs of any turnaround."
The comment starts out strong; "signs everywhere" but only of "some stability". Of course, it ends with the wet blanket of no turnaround.
So what's left of the trade? Valuation would say not much. On our numbers, the enterprise value is trading at almost 10.5x 2010 EBITDA. While sub 9% pricing on the bond deal could be a small catalyst, evidence of an actual recovery may be the only real catalyst. Otherwise, 10.5x looks a touch pricey to us.
Our new 2009 numbers are $0.60 and $755 million in EPS and EBITDA, respectively, and $0.46 and $720 million for 2010.