Wyndham Earnings: Travelers and Owners Continue To Find Value in the Brand; Shares Undervalued

Wyndham Hotels & Resorts WH shares traveled higher on the back of another solid earnings report showing that demand for the company’s brand (the source of its narrow moat) is resonating with visitors and owners. We don’t plan a material change to our $89 fair value estimate and believe the shares should trade closer to a 14-15 times forward enterprise value/EBTIDA multiple versus the current 12-13 times.

Second-quarter global constant-currency revenue per available room rose 7%, driven by a 34% increase in international markets, with China reaching 99% of 2019′s level. U.S. revPAR dropped 1%, as it faced tough comparisons. Still, domestic revPAR was 108% of prepandemic marks, up 30 basis points from last quarter, and it has recently reaccelerated, with June and July at 110% and 112% of 2019′s levels, respectively. As a result, management continues to expect 2023 revPAR to rise 4%-6%, and we plan to increase our forecast to 5% from 4%. Over the long term, Wyndham expects revPAR growth to average 2%-3%, but we think the metric can average closer to 4%; we estimate that incremental demand from U.S. infrastructure spending can contribute around 1 percentage point annually during the next several years.

Signs continue to exist that Wyndham’s brand is reverberating with owners. In fact, the company’s pipeline grew 10% from last year to 228,000 rooms, representing 27% of its existing base, owner retention rates rose 20 basis points to 95.3%, and unit growth was up 4% (3.2% organically). In particular, the hotelier’s new extended-stay brand, Echo, signed 60 contracts in the quarter and now has 265 awards amounting to 33,000 rooms, already 4% of its existing base since launching late in 2022. As a result, we continue to have confidence in management’s 2023 and long-term net unit growth targets of 2%-4% and 3%-5%, respectively.