Playa Hotels & Resorts has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 15.8% to $9.80 per share while the index has gained 14%.
Is there a buying opportunity in Playa Hotels & Resorts, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.We're sitting this one out for now. Here are three reasons why there are better opportunities than PLYA and a stock we'd rather own.
Why Do We Think Playa Hotels & Resorts Will Underperform?
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.
1. Weak RevPAR Growth Points to Soft Demand
Investors interested in Travel and Vacation Providers companies should track RevPAR (revenue per available room) in addition to reported revenue. This metric accounts for daily rates and occupancy levels, painting a holistic picture of Playa Hotels & Resorts’s demand characteristics.
Playa Hotels & Resorts’s RevPAR came in at $252.12 in the latest quarter, and over the last two years, its year-on-year growth averaged 12.1%. This performance slightly lagged the sector and suggests it might have to invest in new amenities such as restaurants and bars to attract customers - this isn’t ideal because expansions can complicate operations and be quite expensive (i.e., renovations and increased overhead).
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Playa Hotels & Resorts’s revenue to drop by 2.3%, marking a decrease from its 8.2% annualized growth for the past two years. This projection doesn't excite us and suggests its products and services will face some demand challenges.
3. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Playa Hotels & Resorts’s five-year average ROIC was 2.9%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+. Its returns suggest it historically did a mediocre job investing in profitable growth initiatives.
Final Judgment
We see the value of companies helping consumers, but in the case of Playa Hotels & Resorts, we’re out. That said, the stock currently trades at 18.1x forward price-to-earnings (or $9.80 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are superior stocks to buy right now. We’d recommend looking at Wingstop, a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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