The Hotel Pair Trade: Hilton vs. Marriott

Pair trading is a market-neutral trading strategy of taking opposing positions — long-short — in a pair of highly correlated instruments. It's a risk mitigation strategy that helps to turn a profit from any market condition.

In a Wednesday note, Bernstein identified a potential pair trade in the U.S. hospitality sector. 

The Analyst

Bernstein analyst David Beckel downgraded shares of Marriott International Inc MAR from Outperform to Market Perform and raised the price target from $116 to $132.

The analyst maintained his Outperform rating on the shares of Hilton Worldwide Holdings Inc HLT and increased the price target from $75 to $86.

The Thesis

The Marriott downgrade was primarily due to the belief that identifiable earnings catalysts such as tax reform and credit card renegotiation have all been discounted by the stock, Beckel said. The analyst said he sees "plenty" of political obstacles for the tax reform. (See Beckel's track record here.)

Even if a tax reform bill is signed by President Donald Trump, Beckel said it might not lead to higher corporate spending on travel.

The impact of credit card synergies on Marriott might be overestimated by the market, Beckel said. 

See also: 3 Things To Keep In Mind Regarding The Marriott Vacations-ILG Buyout Report

Marriott's stock has rallied about 60 percent, outpacing the market, with the valuation improving from 11x to 15x the hotel chain's 12-month EBITDA. The improvement in valuation, according to Bernstein, came from multiple expansion, rather than upward earnings revision.

Bernstein attributed the outperformance to the prospect of the U.S. lodging cycle stabilizing after a multiyear deceleration.

" ... We have seen very little evidence to suggest such optimism is warranted," Beckel said. 

Marriott's share price has also been boosted by potential tangible and material synergies from the Marriott- Starwood Hotels & Resorts Worldwide Inc HOT deal, the analyst said. 

"We view the risk/reward trade-off for Marriott as being negatively skewed, leaving little room for outperformance in the next 12 months." 

While Bernstein "continues to believe in the virtues of the asset-light lodging business" and "still very much [likes] Marriott as a company," Berkel said Hilton is a better avenue for playing the theme. 

Hilton deserves at least as high a multiple as Marriott, given Hilton's larger pipeline relative to its existing footprint; higher ROIC; and less cyclical revenue stream, the analyst said. 

The Price Action

In the year-to-date period, Marriott has advanced 49.41 percent compared to Hilton's 28.29 percent gain.

At the time of writing, Marriott shares were up 1.07 percent at $123.57 and Hilton was advancing a more modest 0.48 percent to $73.67.

Related Link:

Turning Your Vacation Into A Stock Portfolio

Photo courtesy of Hilton.