A report by avahaz on ValueInvestorsClub provides an investment thesis for InterContinental Hotels Group (NYSE:IHG). We will summarize the bullish stance of the author in this article. IHG shares were trading at $91.94 when the report was published, vs. the closing price of $122.74 on Jan 03.
A modern hotel suite showing off the latest in hotel accommodations.
IHG owns, manages, franchises, and leases hotels in the Americas, Europe, Asia, the Middle East, Africa, and Greater China. Some of the famous hotel chains include Six Senses, Regent, InterContinental Hotels & Resorts, Vignette Collection and Holiday Inn.
IHG has an asset-light model with franchises and managed rooms accounting for 80% of revenue and 100% of the bottom line. The key tailwinds to its business include the growth in international travel (4% CAGR since 1995) and domestic travel (7-8% since 1995). The growth in the supply of hotel rooms is only 1%, creating a lag in supply that would enable IHG to increase prices. IHG also seeks to benefit from independent hotels merging with a brand for better visibility. This would enable IHG to increase its supply by 4-5% annually compared to the 1% growth rate in overall supply.
IHG group offers a triple-digit return on invested capital, driven by growth in number of units and revenue per available unit. A 100-150 bps margin expansion is expected that would propel the EBIT margin to 50%. A key driver for additional margin would be the growth in revenue from China, a region where the price is still 10% below 2019 levels and is expected to rise in the near future.
The co-branded credit card business can be another value driver for IHG. IHG managed to earn $35 million, much lower than what its peers Hilton ($345 million) and Marriott ($600 million) generated. This segment forms only 3% of the EBITDA compared to 12-13% for Hilton and Marriott. The contract with Chase was established for 10 years and will expire next year. It provides an opportunity for IHG to renegotiate terms in its favor.
The shares are trading at ~19x its forward EPS, much below its peers. With the growth rate in sight, a valuation of 22x is justified. This would offer an opportunity to earn a double-digit return in the stock that would be higher than the compounding rates achieved in the last 10, 15 and 20 years.
While we acknowledge the potential of IHG as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than IHG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
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