Wyndham Hotels & Resorts: Is Worst Case Scenario Already Priced In?

Summary

WH is down 58.09% from recent highs of $60.94. WH announced on Tuesday (03/17) that it would be withdrawing it’s 2020 outlook announced on 02/13. The previous outlook already had between -5.99% and -7.94% of revenue growth included in the forecast before even considering the impact the coronavirus would have. The hotel industry is one of the most affected by the recent COVID-19 outbreak. Occupancy rates are negligible as people are self-quarantining to prevent the spread of this disease.

The industry uses a metric called “RevPAR” to evaluate performance which stands for “Revenue Per Available Room”. This is calculated by dividing revenue by the number of available rooms where revenue is essentially a function of the occupancy rate and the average daily rate. As demand destabilizes across the entire industry, occupancy rate and average daily rate become much more endogenous.

Wyndham Hotels and Resorts (WH) ended 2019 with 831,000 rooms and a RevPAR of $40.92 and previously suggested in their now void 2020 outlook statement that they expected RevPAR to increase by (2%)-0% and rooms to increase by 2%-4%. (WH) is a franchising company and it’s fee structure is largely dependent on it’s franchisees ability to maintain reasonable RevPAR figures.

For example, (WH) had an average royalty fee of 3.8% in 2019 which resulted in about $480 million dollars (almost 25% of it’s revenue). This royalty fee is quite literally 3.8% of the average revenue of it’s franchisees.

Despite most of it’s revenue essentially being a variable cost to franchisees which are struggling to fill rooms, there may still be a bright side to this story. Many of (WH)’s expenses are structured as variable costs as well. It’s possible that over half of the expenses on the 2019 income statement could be shed in dire circumstances and the company’s half a billion dollars in current assets would come close to covering the remainder.

This suggests that (WH) is likely to come out of this situation alive. The question that remains is whether or not it’s franchisees can come out of it alive. Losses in franchisees would mean less rooms for (WH) to collect fees on. Otherwise, the company would likely be unaffected in the long-term after suffering a loss in revenue in the short-term. The company is without a doubt going to have an earnings cut this year; however, if it can get through this crisis without shedding most of it’s properties and rooms, it should be able to continue it’s trajectory once this is all over.

Considering that this stock was trading at multiples of around 2.8 before this situation came up, and assuming that those valuations still hold up in this new market, the expectation of the market seems to be that the company would only make about $850 million dollars in revenue this year which would be over two quarters of completely lost revenue. However, if we are entering a true bear market, valuations are likely to be lower across the board and that revenue expectation would need to be adjusted upward.

In any case, this is probably a risky play for short-term investors but a value play for investors with a 3–7 year horizon as most of the long-term damage is likely already priced in.