Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

Can Hilton survive the Pandemic?

No company could be more vulnerable to the pandemic than Hilton Hotels Corporation (NYSE: HLT). Statista estimates Hilton operated 6,412 hotels worldwide in 2020.

In detail, Hilton (HLT) operates 5,109 hotels in the United States, 452 hotels in Europe, 325 hotels in the Americas outside the USA, 423 hotels in the Asia-Pacific region and 103 hotels in the Middle East and Africa. Those hotels contained 1.02 million rooms in 2020 up from 971,870 in 2019, Statista estimates.

Predictably, the pandemic’s travel disruption has hit Hilton hard. For instance, Hilton reported a -$195 quarterly operating loss on 31 December 2020. In contrast, Hilton reported a $348 million operating income on 31 December 2019.

The Incredible Shrinking Hilton

Dramatically, Stockrow estimates Hilton revenue growth fell by -62.43% in the quarter ending on 31 December 2020.

Moreover, Hilton experienced four straight quarters of revenue shrinkage in 2020. The revenues shrank by -12.89% in the quarter ending on 31 March 2020, -77.29% in the quarter ending on 30 June 2020, and -61.04% in the quarter ending on 30 September 2020.

Similarly, Hilton’s quarterly revenues fell from $2.369 billion on 31 December 2019 to $890 million 31 December 2020. Plus, the quarterly operating cash flow fell from $202 million on 31 December 2019 to -$138 million on 31 December 2020.

Mr. Market Overprices Hilton

Thus, Hilton is losing money as its revenues shrink. Mr. Market, however, has not noticed.

Mr. Market paid $127.28 for Hilton Hotels (NYSE: HLT) on 15 April 2021. The stock price rose from $70.01 on 14 April 2020.

The disconnect between the stock price and the financial numbers will cause many people to ask what do investors see at Hilton? My suspicion is that the investors are looking at Hilton’s assets and cash.

For example, Hilton’s total assets grew from $14.957 billion on 31 December 2019 to $16.755 billion on 31 December 2020. Similarly, the cash and short-term investments grew from $630 on 31 December 2019 to $3.263 billion on 31 December 2020.

Hilton Borrows to Survive

Thus, Hilton (NYSE: HLT) added some value in 2020. Unfortunately, that value appears to come from borrowing.

For example, Hilton’s quarterly financing cash flow rose from -$305 million on 31 December 2019 to $1.1 billion on 31 March 2020. The quarterly financing cash flow fell to $982 million on 30 June 2020 and $5 million on 30 September 2020. Hilton ended 2020 with a quarterly financing cash flow of -$55 million on 31 December 2020.

Overall, Hilton’s total debt grew from $7.993 billion on 31 December 2019 to $10.487 billion on 31 December 2020. Therefore, Hilton only survived 2020 by borrowing a lot of money.

Therefore, I consider Hilton a sick company. Hilton is unhealthy because the only it can raise money is to borrow. Conversely, Hilton has enormous real estate holdings so it can borrow against the real estate. Yet, Hilton will have to rent hotel rooms again to repay all the debt it took on.

Can Hilton Survive?

Hilton (HLT) investors speculate that travel will recover fast after the COVID-19 pandemic ends.

Travel growth has been a good bet for a long time. The World Bank estimates the number of international airline passengers worldwide grew from 310.441 million in 1970 to 4.397 billion in 2019.

Conversely, the number of international airline passengers fell to 1.9 billion in 2020, the International Civil Aviation Organization (ICAO) estimates. Thus, the number of air travelers fell by nearly two-thirds if the ICAO is correct.

Consequently, demand for hotel rooms could have fallen by two-thirds or more. In April 2020, the ICAO estimates that the number of airline passengers fell by 92% from 2019. That means 92% of Hilton’s hotel rooms could have been sitting empty in April 2020.

I think Hilton’s only chance of survival is for a fast recovery of travel. Unfortunately, I cannot see that happening.

When Will Travel Recover?

I do not think travel will recover until most countries achieve herd immunity to COVID-19. Unfortunately, much of the world is far from herd immunity.

To explain, most experts think 60% to 70% of the population needs to be immune to SARS-CoV-2 (coronavirus) for a society to achieve herd immunity, Nature reports. Unfortunately, most countries are far from herd immunity.

For example, only 16.78% of Germany’s population had received vaccinations on 13 April 2021, Ourworldindata estimates. Similarly, only 6.19% of Russia’s population, 7.05% of India’s population, 11.10% of Brazil’s population, and 13.5% of Turkey’s population had received a vaccine on 13 April 2021.

Frighteningly, Ourwordindata estimates only one country Israel had achieved a vaccine rate of over 60%. Israel had vaccinated 61.64% of its population on 13 April 2021.

Additionally, only one large country, the United Kingdom, had a COVID-19 vaccination rate approaching 47.51% on 12 April 2021. In contrast, the United States had a vaccination rate of 36.13% on that date.

Given the vaccine rate numbers, and the percentages required for herd immunity, I do not think travel will recover soon. To explain, I do not think unvaccinated people will travel to infected areas.

Similarly, many countries will block travelers from COVID-19 hot spots. SARS-CoV-2 variants will make the situation worse by creating hysteria.

Hilton is a terrible stock

Given these realities, I consider the Hilton Hotels Corporation (NYSE: HLT) a terrible stock with a horrendous margin of error.

For instance, Hilton has not paid a quarterly dividend since 31 March 2020 when it paid 15₵ a share. I predict Hilton will not pay a dividend for the foreseeable future.

Moreover, I think Hilton’s share price could collapse fast if there is quick recovery from coronavirus. I think the low levels of vaccine makes a fast recovery from COVID-19 improbable. Therefore, Hilton’s hotel rooms will sit empty and the company will lose money for the foreseeable.

Smart investors need to avoid Hilton because I think this stock is heading for a collapse. Hopefully, I will be wrong and there will be a fast recovery from coronavirus.