Hilton creates value with minimum capital investment

Hilton's results beat 4Q14 and fiscal year 2014 estimates (Part 5 of 7)

(Continued from Part 4)

Management and franchise segment growth

Hilton Worldwide (HLT) expanded its operations substantially in segments that require less capital investment. This includes the Management and Franchise segment and the Timeshare segment. The Management and Franchise segment requires less capital.

The capital requirement is minimal in this segment. The company only manages and supervises the property on behalf of the owners. It pays a management fee or charges franchise fees for the use of its brand name or other services. Other companies in this segment include Marriott International (MAR), Starwood Hotel & Resorts (HOT), Hyatt Hotels, and Wyndham Worldwide (WYN).

With a capital investment as low as $112 million since 2007, Hilton added 247,000 rooms. It generated an annual run rate adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $499 million. The annual run rate adjusted EBITDA is calculated as the adjusted EBITDA for the segment divided by total number of rooms multiplied by the number of rooms added between December 31, 2007 and December 31, 2014.

Investors can gain exposure to high-growth stocks, like Hilton, through ETFs like the PowerShares Dynamic Leisure and Entertainment Portfolio (PEJ) and the Consumer Discretionary Select Sector SPDR Fund (XLY).

Hilton’s CEO comments

Christopher Nassetta, Hilton’s president and CEO, said during the 4Q14 earnings call that “Our 12 distinct brands across 4,300 properties and 715,000 rooms drive an industry leading average global RevPAR index premium of 15%. These leading premiums drive superior returns for our owners and that in turn drives greater investment and faster unit growth. By strategically deploying our brand globally, we believe that we have the capacity to grow faster in every major region of the world, which our recent performance would clearly support. Also important to note, is that our leading net unit growth requires de minimis amounts of our capital.”

Continue to Part 6

Browse this series on Market Realist:

• Part 1 - Why did Hilton’s revenue increase in 2014?

• Part 2 - Hilton generates 78% EBITDA from US markets

• Part 3 - Hilton could start returning capital to shareholders