We have recently introduced Hyatt Hotels Corporation (H) to The Value Line Investment Survey. The company is a global hospitality firm that manages, franchises, owns, and develops Hyatt-branded hotels around the world.  As of December 31, 2009, its portfolio consisted of 424 properties in 45 countries worldwide, with 122,317 rooms and units. The company’s full-service hotels operate under five world-recognized brands: Park Hyatt, Grand Hyatt, Hyatt Regency, Hyatt, and Andaz.

The company was founded by Jay Pritzker in 1957 when he purchased the Hyatt House motel adjacent to the Los Angeles International Airport. Hyatt now has about 45,000 employees, with roughly 80,000 associates that are employed by third-party owners and franchisees. Hyatt’s headquarters are in Chicago.

Hyatt has seen its business begin to rebound in the past couple of quarters, as it recovers from a weak 2009. Last year, the company reported a loss of $0.28 per share, as the global recession took a toll on the company’s business. The recent turnaround has been supported by a stronger-than-expected recovery in the lodging industry. Business travel has been improving in recent months, and this has boosted occupancy levels. International demand has been particularly strong. 

Management has been focusing its efforts on the upscale and luxury markets. We think this gives it more exposure to the upside when the economy fully recovers and travelers can afford more pricey room options. This ought to help boost revenue-per-available room, which should widen margins and support bottom-line gains in the coming quarters.

Hyatt has one of the strongest balance sheets in the industry, with roughly $1.2 billion of cash on hand and only about $850 million in debt. We think the company has several options regarding what to do with all its cash. It will likely continue to pay down its debt in the years to come. It may also be in the market for some smaller acquisitions. However, given the uncertainty in the global markets, we think it would also be a wise strategy to maintain a safe amount of cash on its balance sheet just in case things don’t improve as anticipated.

One major concern that we have is that a slower-than-expected recovery in the global economy could hamper consumer spending. This would lead to weakened demand for the company’s rooms, particularly for the upscale market. An increase in global terrorism could also make individuals more reluctant to travel and hurt business results.

We also note that corporate expenses have trended higher in recent quarters. Management has been renovating some of its properties, and we think this will likely continue in the near term. This could temper some of the earnings growth that we look for in the coming months.  

As a result of the downturn in the global economy, and the ongoing credit crisis, we think the supply of new hotels will be constrained over the next few years as very few projects are built, owing to the difficulty in getting financing. We think this should help Hyatt boost occupancy rates and profits during this time frame, as demand may outstrip supply.

All told, we view Hyatt as a promising company with good earnings potential. We think the lodger should benefit from an improving economy, higher occupancy rates, and strong business travel. International revenue-per-available room is expected to be particularly strong, thanks to the company’s focus on the growing higher-end market. With a strong balance sheet, and minimal new competition over the next few years, we think Hyatt is a good choice in the Hotel/Gaming sector.    

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.