Hilton trades at $315.85 per share and has stayed right on track with the overall market, gaining 17.9% over the last six months. At the same time, the S&P 500 has returned 13.3%.
Is there a buying opportunity in Hilton, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Hilton Will Underperform?
We don't have much confidence in Hilton. Here are three reasons you should be careful with HLT and a stock we'd rather own.
1. RevPAR Hits a Plateau
Investors interested in Consumer Discretionary - Travel and Vacation Providers companies should track RevPAR (revenue per available room) in addition to reported revenue. This metric accounts for daily rates and occupancy levels, painting a holistic picture of Hilton’s demand characteristics.
Over the last two years, Hilton failed to grow its RevPAR, which came in at $105.97 in the latest quarter. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Hilton might have to invest in new amenities such as restaurants and bars to attract customers - this isn’t ideal because expansions can complicate operations and be quite expensive (i.e., renovations and increased overhead). 
2. Weak Operating Margin Could Cause Trouble
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Hilton’s operating margin has been trending up over the last 12 months and averaged 22.1% over the last two years. The company’s higher efficiency is a breath of fresh air, but its suboptimal cost structure means it still sports lousy profitability for a consumer discretionary business.
3. Cash Flow Margin Set to Decline
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts predict Hilton’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 17.9% for the last 12 months will decrease to 16.3%.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Hilton, we’ll be cheering from the sidelines. That said, the stock currently trades at 34.5× forward P/E (or $315.85 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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