Cheaper than the peer group? Depends on which metric. Don't forget about the JV debt.
Lodging stocks have been pounded over the last 2 weeks so the "discount valuation" thesis is not as compelling as it once was. There is another issue with that thesis. Whisper valuations around the Street pegged the EV/EBITDA multiple at 10-11x. "You gotta include the JV EBITDA". Fair enough - we do - but you also have to include the JV debt of $500 million, the amount of which is disclosed only in a footnote.
At the stated range of $23‐26, we estimate the EV multiple on 2010 EBITDA is 11.8x‐13.4x. That doesn’t sound cheap unless you compare it to the lofty peer group multiples. The midpoint of the Hyatt offering range is at a slight discount to the peer group average multiple of 13.2x. The chart below details the valuation comparisons.
A bull may argue that given Hyatt’s positive net cash position, it should be valued at a premium to HOT (4x leveraged) and MAR (3x leveraged). On the other hand, Hyatt’s complicated and shareholder‐unfriendly voting structure should punish the valuation. If you think your Class A shares (worth 1 vote per share versus 10 votes for a Class B share) will ever influence management I've got a bridge to sell you. One only needs to look at Orient Express (OEH) for an example of investor disdain with complex voting structures.
On a free cash flow basis, Hyatt’s valuation looks expensive with a 2010 yield of only 4%, as shown in the chart below. However, Hyatt has the financial resources to make accretive acquisitions. We estimate that for every $1 billion in acquisitions, Hyatt could generate 10-18% free cash flow per share accretion.
If one is a lodging bull, the Hyatt deal could make sense, particularly at the low end of the range. Hyatt will generate approximately 60% of its gross profit from hotel ownership, much larger than the HOT/MAR peer group, which gives the company higher operating leverage to a recovery. Moreover, Hyatt's balance sheet can absorb a lot more debt to acquire assets and further lever the company to the recovery. However, If you share our view that the duration of this downtown will be longer than expected, Hyatt is probably not the best stock play.