5 Reasons To Avoid Hilton
With new cases of the coronavirus spiking in the US and worldwide.
With the already historic unemployment levels and job losses in recent months.
And with many Blue Chip stocks looking vulnerable when they’re supposed to be among the best areas to invest your capital.
There are few safe places to invest your capital today. And this number is growing smaller every day this crisis lasts.
The key to continue compounding your investments and build wealth is to keep investing well over time.
Most people think the number one way to do that is to invest in assets that will grow your capital over time.
And this is huge part of things.
But another huge part of this is also losing as little capital as possible.
The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you can invest well to grow your wealth.
Both things are necessary to build wealth. But most only think of investing well. Not in preserving capital.
Today I want to talk about the second part of things that few consider… Staying away from investments that you have a high probability to lose your capital with.
5 Reasons To Avoid Hilton Worldwide
- It’s Got An Enormous Amount of Debt
As of the most recent quarter Hilton Worldwide’s (HLT) balance sheet is made up of 107.6%. That means the company has more debt than assets.
In other words, after subtracting total liabilities from total assets there’s a negative number. This means after subtracting debt from assets that the stocks equity – the shares you buy on the market – are worth less than $0.
It’s also why I can’t tell you what its debt/equity ratio is like I normally do in these articles. Because there’s no equity left over after subtracting debt.
This is rare when you see this at an operating company. But it’s horrible.
I want to invest in safe stocks that will be around for decades to come to help me build wealth over the long term. This helps insure I lose as little money as possible over time.
Typically, this means I invest in companies that have little to no debt compared to their cash and equity.
Just how bad is its debt situation…
As of this writing it has a total of $11.4 billion in short and long term debt and capital leases.
This is 48.3% of its current $23.6 billion market cap.
And this debt is only against the $3.5 billion Hilton currently has in cash.
Hilton has 2.3X more debt than its cash levels.
And in the last decade combined Hilton’s only produced $9.4 billion in free cash flow.
Hilton has way too much debt compared to its assets and profitability. And this makes the investment risky.
This is illustrated further with its interest coverage ratio…
As of this writing Hilton has a 1.5 interest coverage ratio… Meaning its barely earning enough profits to cover the interest payments on its debt.
Any number above 1 means the company is earning enough profits to cover its debt payments.
Hilton is only slightly above this number which puts it in danger of not being able to cover its debt payments.
And when a company can’t pay its debt it either issues more shares or debt to raise more cash to cover these payments… Or it goes bankrupt.
I’ll talk more about its unprofitability below which is the next reason to avoid its stock.
2. It’s Unprofitable
In the most recent quarterly data BP was unprofitable on a net income basis.
These due to lower revenue combined with increased costs related to the coronavirus which I’ll tell you about further below.
Its net income margin in the trailing twelve months (TTM) period is negative 7.1%.
EDITOR’s NOTE – Trailing twelve months just means the last 12 months consecutively.
Generally, you want these numbers to be as high as possible on the positive side because that means the company is generating more profits and cash flow from its operations.
But these were negative in the last quarter to a large degree when it comes to net profits. And the only reason it was profitable on a free cash flow basis was because the company issued $1 billion more in debt in the most recent quarter.
This combination of unprofitability combined with increasing debt and the near inability to cover debt payments is unsustainable.
And there’s still one more reason to avoid its stock…
3. Uncertainty Related To The Coronavirus
This all circles back to the beginning and businesses getting hammered by the coronavirus.
Air travel, hotels, and restaurants are still getting hammered.
As of May 2020, airline travel was estimated to fall by $314 billion – or 55% from 2019 levels.
Revenues worldwide for hotels are down between 40% and 60% due to far fewer people traveling and staying at hotels.
An estimated 70% of rooms are vacant in hotels as of May.
And it’s expected that hotel operators alone have already cut more than 4 million jobs and lost $21 billion in revenue.
Many industries are getting crushed due to the coronavirus related factors… But travel, airlines, and hotels are among the worst ones hit.
And with coronavirus cases rapidly increasing in the US and worldwide as of this writing, hotels will continue getting crushed for the foreseeable future.
Its large debt load makes the company vulnerable in normal times…
But we’re not living in normal times.
The far lower revenue, profits, and cash flows stemming from far lower travel and stays at hotels during this pandemic put this entire industry at risk… And Hilton is one of those at risk.
You can read more about the problems affecting hotels in this article.
But there’s still two more reasons to avoid its stock…
4. Its Massively Overvalued
With the markets at or near all-time highs you might expect Hilton to be decently valued considering its issues.
But it’s not.
As of this writing its P/E is 656.7.
Its P/CF is 14.1.
And its forward P/E is 158.7.
On all three metrics I look to buy investments below 20 to consider them undervalued.
This means, at its current valuations that Hilton is massively overvalued.
And this means owning its stock offers you zero margin of safety in investing terminology.
When you have a margin of safety it means you’re buying a safe investment… And this makes the investment even less risky.
When you don’t have a margin of safety it means the investment is riskier…
And in this case with Hilton being so enormously overvalued it makes its stock extremely risky.
Especially when considering all the above and the last reason to avoid its stock…
5. Hotels Can’t Pay Their Bills
With hotels generally high debt loads combined with the lack of revenue, profits, and cash flow from people avoiding hotels due to the coronavirus they’re in massive trouble.
And some new info came out on August 19th that is even scarier than what I showed you in the article on InterContinental Hotels above…
As of this writing its estimated that as many as 25% of hotels are at risk of foreclosure.
And that 23.4% of hotels are 30 days or more delinquent on their loan payments.
For comparison only 1.3% of hotels were delinquent as of the end of 2019.
In total its estimated that $20.6 billion in hotel debt is 30 days or more delinquent.
These are the highest delinquency rates and the most amount of delinquent debt in the history of the hotel industry.
And these issues are not just that… Issues.
These combined with everything above is a crisis in the entire industry that could lead to devastation, mass bankruptcies, and mass job losses. On top of all the bad that’s already happened in the industry…
Thing’s look like they’re about to get far worse.
I recommend you stay far away from investing in this entire industry for the reasons above. But especially stay away from Hilton.
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