Goldman Sachs Upgrades InterContinental Hotels to "Buy" and Downgrades Whitbread to "Neutral" – What Investors Need to Know
Goldman Sachs Elevates InterContinental Hotels Group to "Buy" Amid Strong Financial Prospects
In a recent note dated Wednesday, Goldman Sachs has made significant adjustments to its ratings within the European hotel sector. The investment bank has upgraded InterContinental Hotels Group (IHG) to a "buy" from "neutral," while simultaneously downgrading Whitbread (LON:WTB) to "neutral" from "buy."
Key Takeaways from Goldman’s Note on IHG:
- Price Target and Upside Potential:
- Goldman Sachs has set a new price target of 9,350p for IHG, indicating a potential upside of approximately 20%.
- Earnings Growth and Shareholder Returns:
- IHG is expected to deliver a robust 15.1% EPS CAGR over the period 2023-2028.
- The company projects a 7% annual shareholder return through dividends and share buybacks.
- IHG boasts one of the highest ROIC in the industry, estimated at around 46% by 2025.
- Factors Driving the Upgrade:
- Stronger-than-expected fee revenue growth.
- Larger share buybacks outpacing consensus estimates.
- Improved enterprise platform with enhancements to its loyalty program and brand portfolio.
- Operational improvements, including the integration of Amadeus’ Guest Reservation System.
- A significant valuation gap between IHG and U.S. peers like Marriott and Hilton, which Goldman views as unjustified given IHG’s improved metrics.
Ancillary Revenue Streams and Future Prospects:
Goldman Sachs highlights the potential in IHG’s ancillary revenue streams, particularly from co-branded credit cards. The investment bank sees considerable room for IHG to negotiate better terms with its credit card partners, which could drive further earnings upgrades and bolster share buybacks. This area is currently underappreciated in IHG's valuation but holds significant upside potential.
Asset-Light Model and Cash Generation:
IHG’s asset-light business model, with 72% of its rooms franchised, supports high cash generation and strong shareholder returns. This model is expected to sustain IHG's position as one of the most profitable companies in the hotel industry.
Whitbread Downgraded to "Neutral":
Conversely, Goldman Sachs has downgraded Whitbread to "neutral" with a revised price target of 3,500p, reflecting a modest 14% upside.
Reasons for Downgrade:
- Subdued Growth Prospects:
- Whitbread’s like-for-like sales growth in the UK is projected to remain low at 0.5% in FY25.
- The company is expected to add only 1,000 new rooms in the UK in FY25, limiting short-term growth.
- Market Conditions:
- Continued structural shift from independent to budget-branded hotels in the UK.
- Expansion strategy in Germany offers long-term potential but not immediate performance uplift.
- Higher Operating Leverage:
- Whitbread’s higher operating leverage means that any decline in revenue would have a more significant impact on profitability compared to asset-light competitors like IHG.
Analysis: What This Means for You
For investors, these ratings adjustments by Goldman Sachs indicate where the potential opportunities and risks lie in the European hotel sector:
- InterContinental Hotels Group (IHG):
- Opportunity: With a potential 20% upside, robust earnings growth, and strong shareholder returns, IHG presents a compelling buy. The company’s asset-light model and ability to generate free cash flow make it an attractive option for long-term investors.
- Risk: Although IHG has a strong outlook, market conditions and competitive pressures remain factors to monitor.
- Whitbread (WTB):
- Opportunity: Whitbread remains a well-managed entity with strategic long-term growth plans, particularly in Germany.
- Risk: Near-term growth prospects are limited. The company's higher operating leverage makes it more susceptible to revenue declines, translating to greater potential downside compared to asset-light peers.
Bottom Line
Goldman Sachs' latest ratings adjustments provide critical insights into the prospects and strategic positioning of two major players in the European hotel sector. For investors, understanding these dynamics can guide better investment decisions and portfolio adjustments. While IHG appears to offer significant upside and strong financial metrics, Whitbread's near-term outlook suggests a more cautious approach is warranted.