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Hilton: Rooms to Grow

The hotel business is booming, and among the big players, Hilton Hotels (HLT) stands to gain the most.

Thanks to a rising tide of well-heeled travelers, rooms at hotels are filling up, and hotels are calling the shots. In 2004, hotels started raising prices for the first time in years. And because the supply of rooms lags demand, rates should keep rising for at least two years.

Hilton is particularly well-positioned to benefit from improved demand because unlike many big chains that reap most of their revenues from franchises, the company generates more than half of its revenues from company-owned hotels.

That's significant because hotel operators collect a bigger share of revenues from company-owned properties than from franchised units. "At this point in the recovery," says analyst Rod Petrik of Legg Mason, "you want to own the real estate."

And some of Hilton's swank hotels are cash cows in good times. They include flagship properties, such as the Waldorf-Astoria, in New York City, and Waikoloa Village, a resort on Hawaii's Big Island. Both received major face-lifts in the past few years.

Also among Hilton's brands are Doubletree and Hampton Inn, added when the company bought Promus Hotel for $4 billion in 1999.

A 1997 deal with Hilton Group (a separate firm based near London) gave Hilton the right to open Hilton hotels in Canada and Mexico. Such opportunity could help Hilton benefit later in the hotel-industry cycle, when rates tend to hold steady and growth comes from expanding the number of rooms available.

Bear Stearns analysts rated Hilton their top pick among lodging stocks when they reinitiated coverage in January.

Analysts say Hilton's stock looks cheap compared with other hoteliers, based on estimated 2005 and 2006 earnings before interest, taxes, depreciation and amortization (EBITDA). (Analysts judge hotel stocks by comparing their enterprise value to EBITDA).

At $22, Hilton sells for about 30 times the 2005 average analyst's earnings per share estimate of 74 cents. The company pays an annual dividend of 8 cents a share.

--J. Alex Tarquinio

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