Description

Thesis: This is a clean relative-value trade, that can be expressed as an outright long WH or pair against CHH.  WH has >30% upside just by closing its discount to CHH. Further, WH should trade at a premium to CHH, due to its (i) greater scale, (ii) faster room and REVPAR growth, and (iii) stronger brands and loyalty program. I have yet to identify a bear thesis on WH, nor a good fundamental argument for its discount to persist. I would welcome any insights from the community, if there is something I am missing here.

Introduction: Wyndham Hotels & Resorts (WH) has traded poorly since its split from Wyndham Worldwide (WYN) in May 2018.  The transaction separated WYN’s hotel franchise business (now trading under the ticker WH) from its timeshare business (trading under ticker WYND).  While there was some ambiguity around the PF financials of WH immediately following the spin, this was cleared up in the 2Q earnings report, where mgmt reaffirmed FY EBITDA guidance and raised revpar guidance.  The stock traded up immediately post-earnings, but has since given it all back. Most notably, WH’s stock has significantly underperformed its close peer, Choice Hotels (CHH), and currently trades at a 3x EBITDA discount (WH at 11.5x 2019 EBITDA versus CHH at 14.5x).  It has also meaningfully underperformed Intercontinental (IHG), for no apparent reason. Since it's spin, WH is down -16% versus peers only down slightly.

Comparison: Operationally, WH and CHH are closely comparable companies, and there is no reason for WH to trade at such a discount to CHH.  In fact, WH has been growing faster than CHH in terms of both revpar and rooms (#).

Valuation: WH trades at a large discount to CHH on every metric.  I have included Intercontinental (IHG) here as well to illustrate that that valuation dislocation is not CHH’s premium, but rather WH’s discount.  In other words, the long-WH relative valuation thesis is also supported by the valuation of WH’s next closest comp, IHG. WH 2018 metrics are based on mgmt's PF guidance, and 2019 is based on Street consensus.

Business Overview: WH is the largest franchisor of hotels globally.  It licenses its brands to hotel owners, which leverage these brands and Wyndham rewards to attract guests.  WH also manages properties on behalf of third-party owners. It has 4 of the top 5 brands in both the economy (Microtel, Days Inn, Howard Johnson, Super 8) and midscale (Wingate, AmericInn, LaQuinta, Baymont) segments, as measured by JD Power.  Its franchise base of >5700 is highly diversified, with most owners only operating one hotel. Franchise agreements typically last 10-20 years, and drive a 94% retention rate. WH has a long history of tuck-in acquisitions, and in May 2018, they closed on the acquisition of LaQuinta (LQ), which gives WH increased exposure to growth in oil markets, as the domestic energy industry continues to rebound. WH's capital allocation approach includes capital returns (~2% dividend and $300mm buyback authorization) and tuck-in acquisitions (e.g., LQ, AmericInn)

Conclusion:  I have yet to uncover a fundamental argument for WH’s discounted valuation to persist, nor is a technical explanation for WH’s underperformance apparent.  Whether due to event-driven investor positioning ahead of the spin or just a delay in investor engagement with the pro forma company, WH began to trade at a sizeable discount in May and that discount only grown since then.  Ultimately, I believe the spread between WH and CHH must close, as WH demonstrates continued operational execution and integration of LQ. This dislocation in WH’s stock price offers >30% upside as a pair trade against CHH or outright long WH.

DISCLAIMER:  DO NOT RELY ON THE INFORMATION SET FORTH IN THIS WRITE-UP AS THE BASIS UPON WHICH YOU MAKE AN INVESTMENT DECISION - PLEASE DO YOUR OWN WORK.  THE AUTHOR AND HIS FAMILY, FRIENDS, EMPLOYER, AND/OR FUNDS IN WHICH HE IS INVESTED MAY HOLD POSITIONS IN AND/OR TRADE, FROM TIME TO TIME, ANY OF THE SECURITIES MENTIONED IN THIS WRITE-UP.  THIS WRITE-UP DOES NOT PURPORT TO BE COMPLETE ON THE TOPICS ADDRESSED, AND THE AUTHOR TAKES NO RESPONSIBILITY TO UPDATE THIS WRITE-UP IN THE FUTURE.

Catalyst

3Q and 4Q earnings affirm mgmt's guidance and continued operational execution