Since April 2021, the S&P 500 has delivered a total return of 68.6%. But one standout stock has more than doubled the market - over the past five years, Hilton has surged 163% to $330.70 per share. Its momentum hasn’t stopped as it’s also gained 27.1% in the last six months thanks to its solid quarterly results, beating the S&P by 21.7%.
Is there a buying opportunity in Hilton, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Hilton Will Underperform?
We’re glad investors have benefited from the price increase, but we're sitting this one out for now. 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 $110.89 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. Free Cash Flow Projections Disappoint
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’ consensus estimates show they’re expecting Hilton’s free cash flow margin of 16.8% for the last 12 months to remain the same.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Hilton historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 26.2%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Hilton, we’ll be cheering from the sidelines. With its shares outperforming the market lately, the stock trades at 36.5× forward P/E (or $330.70 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward the most entrenched endpoint security platform on the market.
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