High Administrative Costs To Hurt Hyatt (H) In Q2 Earnings

Hyatt Hotels Corporation (NYSE:H) is scheduled to report second-quarter 2019 numbers on Jul 31, after the market closes.

The company’s relentless unit expansion is likely to have driven second-quarter revenues while higher administrative costs and pressure on EBITDA (earnings before interest, tax, depreciation and amortization) are likely to have dented earnings in the to-be-reported quarter.

Despite reporting better-than-expected results in each of the trailing four quarters, shares of Hyatt have gained 15.9% so far this year, underperforming the industry’s 25.7% rally. Also, over the past 30 days, the company’s earnings have witnessed downward revisions, reflecting analysts’ concern surrounding the stock.

Let’s take a look at how the company’s top and bottom lines will shape up in the to-be-reported quarter.

Top Line to Gain

Hyatt’s revenues in the first quarter of 2019 increased 11.9% year over year and the upside trend is likely to have continued in the second quarter. Subsequently, the Zacks Consensus Estimate for revenues in the second quarter is pegged at $1.23 billion, indicating an 8.3% increase from the year-ago quarter’s reported figure.

We believe that top-line growth is attributable to the company’s expansion strategies. Its unit expansion signings across brands have consistently outpaced openings and this trend is expected to have continued in the second quarter of 2019. In 2018, Hyatt registered net room growth of 13.6% on a year-over-year basis. For 2019, it expects unit growth of roughly 7-7.5%, suggesting 80 new hotel openings.

How will Earnings Shape Up?

The Zacks Consensus Estimate for the company’s earnings in the second quarter of 2019 is pegged at 42 cents, suggesting a 41.7% decline year over year. We believe that its high administrative costs and lower EBITDA are likely to have caused earnings to decrease.

In the first quarter of 2019, adjusted EBITDA decreased 7.3% to $187 million (down 6.1% in constant currency). Adjusted EBITDA margin declined 220 basis points (bps) to 28.5%. Also, Direct, and selling, general, and administrative expenses increased 18% year over year in the last reported quarter.

What Does the Zacks Model Unveil?

Our proven model does predict that Hyatt is likely to beat earnings estimates this quarter. This is because a stock needs to have — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Hyatt has an Earnings ESP of +12.43% and a Zacks Rank #3 at present, which make surprise prediction easier. You can see the complete list of today’s Zacks #1 Rank stocks here.

Conversely, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Hyatt Hotels Corporation Price and EPS Surprise

Other Stocks With Favorable Combinations

Here are a few other stocks from the Consumer Discretionary sector that investors may consider as our model shows that these too have the right combination of elements to post an earnings beat in the second quarter:

SeaWorld (NYSE:SEAS) has an Earnings ESP of +11.01% and a Zacks Rank #2. The company is scheduled to report quarterly numbers on Aug 6.

Callaway Golf (NYSE:ELY) currently sports a Zacks Rank #1 and is supposed to report quarterly results on Aug 8. The company’s Earnings ESP is +2.97%.

Wynn Resorts (NASDAQ:WYNN) presently has a Zacks Rank #3 and an Earnings ESP of +2.65%.

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