Hyatt's IPO: Don't Even Go There

By Will Ashworth | September 24, 2009 AAA

According to a September 8 report by Renaissance Capital, a whopping 67 companies have filed S-1 registration statements with the SEC and are looking to go public, up from 29 in March. Renaissance, which specializes in IPO research, suggests most of the current wave is private equity firms looking for some liquidity from their investment portfolio, or mature businesses looking to take advantage of the current aversion to risk. One such company is Chicago-based Hyatt Hotels, filing a registration statement August 5. It appears that the Pritzker family, which owns 85% of the luxury hotel chain, wants to shake loose some cash for its feuding family members. While this may be a great exit strategy for Pritzker progeny, it shouldn't be at the investor's expense. In my opinion, if you buy shares in this IPO, you're just plain nuts. (For an overview of the IPO process, see our IPO Basics Tutorial.)
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Return on Cash - Top Hotel Chains

Company Cash From Operations Adjusted Revenues CFO as a % of Revenue
Hyatt $287M $2.5B 11.5%
Marriott (NYSE:MAR) $641M $4.0B 16.0%
Starwood (NYSE:HOT) $646M $3.9B 16.6%
Wyndham Worldwide (NYSE:WYN) $109M $4.3B 2.5%
Choice Hotels (NYSE:CHH) $104M $305M 34.1%
*Adjusted Revenues excludes revenue from expense reimbursements

Hotel Industry Slumping
Let's forget for a minute that the travel industry isn't hemorrhaging cash and that business is just fine. Looking at the table above, you'll see that several of Hyatt's competitors are doing a much better job of generating cash from revenues. Sure, Hyatt owns some nice properties, like the Park Hyatt's in both Chicago and Toronto, but so too does Marriott and Starwood, operating the Ritz-Carlton and St. Regis respectively. It's a competitive business that the Pritzkers have been a part of since 1957. Nostalgia's great for the collectibles market but it means little in the hotel business. The Hyatt IPO might seem like an interesting investment but if you can get a better return elsewhere - which you can - then you should do that.

Affordable Is the New Trend
Americans have become more frugal because of this recession. Examples abound where consumers are trading down, whether its toilet paper or hotel rooms. Conspicuous consumption has gone away and probably won't come back for some time. This means lower-priced hotel brands like those offered by Choice Hotels will become a real alternative to Hyatt and other luxury chains. For instance, in the second quarter, Choice's average daily rate across its various brands was $70.53. This compares to $116 for a night's stay at a Hyatt. It might not seem like a lot to the rich, but for the average working stiff, paying 60% more for a place to sleep while visiting relatives makes little economic sense. Despite this obvious advantage, Choice's profits are down, though not nearly as much as Hyatt, which lost $36 million in the first six months of the year compared to a $41.8 million profit for Choice. Perhaps that's why Citi Investment Research analyst Michael Bilerman initiated a "buy" rating September 16 for the economy chain. Bilerman believes hotel chains should go through a sustained period of earnings growth once a rising demand meets a slowing supply and that, in turn, should help stock prices. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

Bottom Line
While it's very tempting to take what the Citi analyst has said about hotel industry revitalization and apply that rationale to Hyatt. Don't. There are three alternatives (Choice, Marriott and Starwood) available without the hype of an IPO obscuring the true value of its stock price. You'd be nuts to choose Hyatt over any of them. However, if you must get your Pritzker hit, buy Berkshire-Hathaway (NYSE:BRK.B) stock. It owns 60% of Marmon Group, the Pritzker's industrial conglomerate.

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