Why Did Bill Ackman Buy Hilton Stock?

Pershing Square Capital founder and executive Bill Ackman has been among the most successful investors of the past decade.

After making a name for himself following the 2008 financial crisis, Ackman has gone on to make billions of dollars by investing in undervalued businesses.

One of the largest holdings in Ackman’s portfolio is hotel giant Hilton Worldwide Holdings (NYSE:HLT). So why did Bill Ackman buy Hilton?

How Large Is Ackman’s Position in Hilton?

Pershing Square holds roughly 10 million shares of Hilton, valued at nearly $1.5 billion and accounting for almost 16 percent of Ackman’s portfolio.

Although Ackman’s fund has adjusted its holdings over time, the bulk of its position was purchased in Q4 of 2018. At that time, Ackman acquired 10.9 million shares at an average price of $72.24.

Accounting for other acquisitions and sales over time, Ackman has generated a total return of roughly 86 percent on his Hilton holdings.

Hilton Beats Earnings Five Times In a Row

2022 proved to be an extremely positive year for Hilton in terms of revenue growth. Revenue per available room rose 42.5 percent for the full year and 24.8 percent year-over-year in Q4. This reflected both Hilton’s considerable pricing power and a general resurgence of travel spending among consumers.
Hilton also saw its net income reach over $1.2 billion for the year, outperforming management’s previous full-year guidance. EPS for Q4 was $1.59, far above the consensus estimate of $1.20. This represented Hilton’s fifth consecutive quarterly earnings beat.
In 2023, Hilton plans to increase its net number of units by 5-5.5 percent. This exceeds unit growth in 2022, which totaled 4.7 percent. In terms of earnings, analysts expect Hilton to grow at a respectable rate of 11.6 percent over the coming 12 months.

How High Could Hilton Go?

Despite having a decent potential runway for growth, Hilton stock is not expected to rise much over the next 12 months. Analysts target price for Hilton is $154, just 4.1 percent above the current price of $147.83.

It’s also worth noting that Hilton pays a dividend, albeit a very modest one. Each share currently pays $0.60, equating to a yield of 0.41 percent.

The company has not raised its dividend since 2017, likely making it a poor choice for dividend growth investors. If Hilton does begin raising its dividend again in the future, though, investors could see slight improvements in their total returns.

Hilton also seems to have a mixed outlook in terms of its valuation. The company’s price-to-earnings-growth ratio is roughly 0.7, which would normally indicate an undervalued stock. Given that Hilton’s P/E is over 25 at a time when the S&P 500 average has sunk to under 22, however, could indicate that investors are paying a slight premium for Hilton. Overall, Hilton seems to trade at a roughly fair value at the moment.

Struggles Ahead for Hilton

Hilton is subject to the short-term risk of a macroeconomic downturn. Although Americans are expected to travel more in 2023, they will likely be trying to spend less as inflation and a weakening economy eat into their wallets. This could drive customers away from more expensive luxury hotel brands like Hilton.

And while the company is rolling out a new economy hotel line called Spark, the brand may not be established enough to benefit the company much this year.

Hilton’s international properties may also struggle, as consumers will likely focus more on domestic travel this year. This could present a challenge for further earnings growth, at least in the short term.

Despite these risks for the coming year, Hilton appears to be in a reasonably strong long-term position. The company is continuing to increase its number of available units while also introducing new hospitality packages for consumers. While a recession could stifle growth temporarily, Hilton would also likely benefit from the following recovery.

Why Does Bill Ackman Own Hilton?

Bill Ackman is well-known for investing in businesses he believes to be top performers in their industries. While many of Ackman’s most public investments have involved companies facing financial difficulties, his investment in Hilton appears to have been more of a pure value play.

Given the significant returns Pershing Square has generated while holding Hilton, Ackman seems to have correctly analyzed the company as an undervalued asset.

Hilton also fits Ackman’s strategy of finding companies that Pershing Square can hold over long periods of time. The company is currently building new units at a fairly rapid pace, setting itself up for future increases in revenue and earnings. As such, investors like Ackman who hold large stakes purchased at a lower cost basis could see further growth by continuing to hold.

At today’s prices, however, there may not be as much value to be had. Hilton appears to trade at a more or less fair value. The stock may also have limited short-term upside, given that it is only projected to gain about 4 percent this year and may struggle due to reduced consumer spending.

Taking a longer view, though, Hilton could still be a good choice for more conservative investors looking for opportunities in the hospitality industry. As a well-established luxury hotel brand with substantial market share, Hilton enjoys a reasonably strong moat.

Over time, the company’s continued investment in building new units could bear fruit. Hilton is also investing some of its excess cash in stock repurchases that will likely benefit long-term shareholders.

For investors looking for modest upsides at relatively low risk levels, Hilton could be a good fit. Investors seeking more aggressive gains, however, may want to look elsewhere.

Although Bill Ackman has certainly made money by buying Hilton stock when the company was undervalued, today’s prices appear much closer to the company’s fair value. Investors eyeing Hilton should be willing to buy and hold, as the company and stock could still struggle this year.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.