Wealthy investor Bill Ackman holds nearly one fifth of his investment portfolio in an outstanding travel-related share.
Bill Ackman, a renowned 21st-century investor with a $10 billion-plus hedge fund, Pershing Square, is a huge fan of Warren Buffett's investing strategy. His goal is to create a high-quality stock portfolio, holding onto these investments for years. One such stock has been Hilton Hotels (HLT) since 2018, accounting for 18.5% of Pershing Square's portfolio. The stock has surged close to 200% since 2018.
Why does Ackman fancy Hilton Hotels? Let's break it down.
Global Travel's Trusted Companion: Hilton
Originating in Texas, Hilton Hotels is nearly a century old, focusing on offering premium hotel experiences and establishing a trusted brand for travelers. While the business model's core remains unchanged, its approach has evolved. Instead of directly owning properties, Hilton licenses its name to property owners. The property owners foot the capital bills, making Hilton's business model a low-cost approach.
By associating with Hilton, property owners benefit from higher occupancy rates and room prices – more than making up for the yearly license fee paid to Hilton Corp. This tiny compromise offers significant upsides for both parties.
Hilton's framework as a franchiser stands out as a powerful take rate on global travel. The brand is always growing by adding new hotels via acquisitions or organic development. Last quarter alone saw 18,000 net room additions worldwide. With the average revenue per room projected to rise by 2% to 3% this year, Hilton's earnings will likely grow too.
Shareholder-Friendly Strategies
With surplus cash and limited demands for new investments (property owners finance the construction of new properties), Hilton generously returns funds to shareholders. By opting for stock buybacks, the share count reduces while the ownership of existing shareholders such as Bill Ackman increases. Over the last 10 years, Hilton has reduced its share count by 25%, making it one of the leading repurchasers in the market.
To Buy or Not to Buy?
As of the latest guidance, Hilton is anticipating EPS of over $6 by 2024. With a market price of $232.91, Hilton has a forward P/E ratio of 38.8 – well above the S&P 500 index average. Though Hilton's stock has risen by 60% in the past year, its elevated P/E ratio has gone up in tandem.
While calling the shots, stay patient. Hilton is thriving financially. However, the P/E ratio seems steep for a low-growth business, which could potentially be a risk factor.
Consider keeping an eye on Hilton if you're a potential investor but avoid it for now due to its high P/E ratio.
Ackman's continued investment in Hilton Hotels can be attributed to the company's finance strategy, which includes generating revenue through licensing agreements with property owners, resulting in a low-cost business model. Furthermore, Hilton's shareholder-friendly approach, such as large-scale share buybacks over the past decade, has increased Ackman's stake in the company.
