Hospitality company Playa Hotels & Resorts (NASDAQ:PLYA) beat analysts' expectations in Q1 CY2024, with revenue up 9.8% year on year to $300.6 million. It made a non-GAAP profit of $0.40 per share, improving from its profit of $0.31 per share in the same quarter last year.
Playa Hotels & Resorts (PLYA) Q1 CY2024 Highlights:
- Revenue: $300.6 million vs analyst estimates of $282.8 million (6.3% beat)
- EPS (non-GAAP): $0.40 vs analyst estimates of $0.33 (22.8% beat)
- Gross Margin (GAAP): 54.1%, in line with the same quarter last year
- Market Capitalization: $1.29 billion
Sporting a roster of beachfront properties, Playa Hotels & Resorts (NASDAQ:PLYA) is an owner, operator, and developer of all-inclusive resorts in prime vacation destinations.
The company's portfolio includes over 20 resorts, offering more than 7,500 rooms across Mexico, the Dominican Republic, and Jamaica. Some of its most sought-after vacation spots include Cancun, Los Cabos, and Montego Bay.
Playa Hotels & Resorts has established a unique niche in the all-inclusive sector by partnering with globally recognized brands such as Hyatt and Hilton. These collaborations have allowed Playa to leverage the strong brand recognition and loyalty programs of its partners while maintaining its distinctive approach to all-inclusive, luxury vacation experiences. The company's resorts offer a range of amenities and services, including gourmet dining, premium beverages, entertainment, and recreational activities, all within the convenience of an all-inclusive package.
Playa is known for its contemporary resort designs and invests in renovations and upgrades to its properties to remain competitive.
Hotels, Resorts and Cruise Lines
Hotels, resorts, and cruise line companies often sell experiences rather than tangible products, and in the last decade-plus, consumers have slowly shifted from buying "things" (wasteful) to buying "experiences" (memorable). In addition, the internet has introduced new ways of approaching leisure and lodging such as booking homes and longer-term accommodations. Traditional hotel, resorts, and cruise line companies must innovate to stay relevant in a market rife with innovation.
Playa Hotels & Resorts's primary competitors include AMResorts (owned by Hyatt Hotels NYSE:H), Marriott International (NASDAQ:MAR), Hilton Worldwide (NYSE:HLT), and private companies RIU Hotels & Resorts, Iberostar Hotels & Resorts, Sandals Resorts International, and Barceló Hotel Group.Sales Growth
A company’s long-term performance can give signals about its business quality. Any business can put up a good quarter or two, but many enduring ones muster years of growth. Playa Hotels & Resorts's annualized revenue growth rate of 9.6% over the last five years was weak for a consumer discretionary business.
Within consumer discretionary, a long-term historical view may miss a company riding a successful new property or emerging trend. That's why we also follow short-term performance. Playa Hotels & Resorts's annualized revenue growth of 21.8% over the last two years is above its five-year trend, suggesting some bright spots.
We can dig even further into the company's revenue dynamics by analyzing its revenue per available room, which clocked in at $427.17 this quarter and is a key metric accounting for average daily rates and occupancy levels. Over the last two years, Playa Hotels & Resorts's revenue per room averaged 27.7% year-on-year growth. Because this number is higher than its revenue growth, we can see its room bookings outperformed its sales from other areas like restaurants, bars, and amenities.
This quarter, Playa Hotels & Resorts reported solid year-on-year revenue growth of 9.8%, and its $300.6 million of revenue outperformed Wall Street's estimates by 6.3%. Looking ahead, Wall Street expects revenue to decline 3.9% over the next 12 months, a deceleration from this quarter.
Operating Margin
Operating margin is an important measure of profitability. It’s the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. Operating margin is also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Playa Hotels & Resorts has been a well-managed company over the last eight quarters. It's demonstrated it can be one of the more profitable businesses in the consumer discretionary sector, boasting an average operating margin of 17.8%.In Q1, Playa Hotels & Resorts generated an operating profit margin of 30%, up 1.9 percentage points year on year.
Over the next 12 months, Wall Street expects Playa Hotels & Resorts to become less profitable. Analysts are expecting the company’s LTM operating margin of 18.8% to decline to 17.5%.EPS
Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability and efficiency of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.
Over the last five years, Playa Hotels & Resorts's EPS grew 25.4%, translating into a weak 4.6% compounded annual growth rate. Furthermore, this performance is worse than its 9.6% annualized revenue growth over the same period. There are a few reasons for this, and understanding why can shed light on its fundamentals.
A five-year view shows Playa Hotels & Resorts has diluted its shareholders, growing its share count by 5.5%. This has led to lower per share earnings. Taxes and interest expenses can also affect EPS growth, but they don't tell us as much about a company's fundamentals.In Q1, Playa Hotels & Resorts reported EPS at $0.40, up from $0.31 in the same quarter last year. This print beat analysts' estimates by 22.8%. Over the next 12 months, Wall Street expects Playa Hotels & Resorts's LTM EPS of $0.50 to stay about the same.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).
Playa Hotels & Resorts's five-year average return on invested capital was 2.4%, somewhat low compared to the best consumer discretionary companies that pump out 25%+. Its returns suggest it historically did a subpar job investing in profitable business initiatives.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last few years, Playa Hotels & Resorts's ROIC has significantly increased. This is a good sign, and we hope the company can continue improving.
Balance Sheet Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly.
Playa Hotels & Resorts reported $285.3 million of cash and $1.06 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company's debt level isn't too high and 2) that its interest payments are not excessively burdening the business.
With $286.9 million of EBITDA over the last 12 months, we view Playa Hotels & Resorts's 2.7x net-debt-to-EBITDA ratio as safe. We also see its $101.6 million of annual interest expenses as appropriate. The company's profits give it plenty of breathing room, allowing it to continue investing in new initiatives.
Key Takeaways from Playa Hotels & Resorts's Q1 Results
We were impressed by how significantly Playa Hotels & Resorts blew past analysts' revenue, operating margin, and EPS expectations this quarter. That outperformance was driven by a beat in its net package RevPAR ($427 compared to estimates of $400) and a strong Mexican Peso, which appreciated relative to the U.S. Dollar. Zooming out, we think this was a great quarter that shareholders will appreciate. The stock is flat after reporting and currently trades at $9.43 per share.
Is Now The Time?
Playa Hotels & Resorts may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We cheer for all companies serving consumers, but in the case of Playa Hotels & Resorts, we'll be cheering from the sidelines. Its revenue growth has been a little slower over the last five years, and analysts expect growth to deteriorate from here. And while its revenue per room has surged over the last two years, the downside is its relatively low ROIC suggests it has historically struggled to find compelling business opportunities. On top of that, its projected EPS for the next year is lacking.
Playa Hotels & Resorts's price-to-earnings ratio based on the next 12 months is 18.9x. While there are some things to like about Playa Hotels & Resorts and its valuation is reasonable, we think there are better opportunities elsewhere in the market right now.
Wall Street analysts covering the company had a one-year price target of $12.67 per share right before these results (compared to the current share price of $9.43).
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