hilton spring 2007
TRANSCRIPT
Hilton Equity Valuation and Analysis
Team Summit Analysts
John Johnson II: [email protected] Deontei Harris: [email protected]
Chance Baucum: [email protected] Matt Loyd: [email protected]
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Table of Contents
Executive Summary……………..2
Overview of Firm…………6
Preliminary Data for Hilton
Sales Volume and Growth Tables…….7
Industry Comparison Table………8
Stock Price Activity Table….9
Industry Overview and Analysis…….10
Value Chain Analysis………….…….16
Firm Competitive Advantage Analysis………18
Accounting Analysis…………21
Ratio Analysis………………38
Forecast Financials………..61
Cost of Capital Estimation……….72
Method of Comparables……76
Intrinsic Valuation Analysis and Z-Score………….80
Analyst Recommendation…………85
References………………………86
Appendices
Appendix 1 (Financials, Ratios, and Valuation Models)…..A-J
Appendix 2 (Regression Data)……………………….K-Y
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Executive Summary
Investment Recommendation: Overvalued, Sell 4/21/07
HLT-NYSE $36.13 EPS Forecast 52 week range $23.19-$38.00 (Yr end)2006 2007(E) 2008(E) 2009(E) Revenue (2006) $8.162Billion EPS 1.48 1.56 1.68 1.82 Market Capitalization $13.74Billion Shares Outstanding 387,000,000 Ratio Comparison HLT HOT MAR Dividend Yield .16 (.50%) Trailing P/E 25.37 14.76 26.93 3-m Avg dividend trading volume 3,412,020 Forward P/E 22.64 23.08 20.18Book Value Per Share $9.63 M/B 3.65 4.92 8.03ROE 3.5% ROA 15.3% Valuation Estimates Est. 5-yr EPS growth rate 35% Actual Price (as of 4/21/07) $36.13 Ratio Based Valuations Cost of Cap Est. R2 Beta Ke P/E Trailing $21.31 Ke est. 10.93% P/E Forward $21.63 5-yr 22.33% 1.101 9.43% Enterprise Value $14.58 1-yr 22.41% 1.104 8.63% 10-yr 22.36% 1.102 11.65% 3month 22.45% .105 10.93% Published 1.53 Intrinsic Valuations Kd HLT: 6.89% Discounted Dividends $3.04 WACC HLT: 7.93% Free Cash Flows $7.33 Altman's Z-score Residual Income $23.70 HLT: 1.45 Abnormal Earnings Growth $49.33
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Recommendation – Overvalued Firm Company, Industry Overview and Analysis
Hilton is one of the Top 3 in the Lodging industry with revenues totaling
approximately $2.2 billion in 2006 and a market capitalization of $13.74 billion. It
was founded in Cisco, TX in 1919 by Conrad Hilton and in April 2007 expanded
its operations to over 500 hotels around the World. In addition to hotels, Hilton
also owns numerous resorts, timeshares, and partnerships with various
businesses around the World. These businesses range from airlines to Car
Rental corporations.
The Lodging industry is made up of numerous firms; however, it is
dominated by three main competitors, Marriott, Hilton, and Starwood. Together,
these three firms constitute “The Big 3” of the Lodging industry and compete
primarily with one another. Due to the fact that little other firms pose major
competition, those at the top of this industry tend to focus on a differentiation
competitive advantage strategy. This strategy involves competing on quality
rather than price through means such as loyalty programs, valet service, 5-star
on site restaurants, shows, concierge service, etc.
Hilton uses a differentiation strategy due to the clientele they cater to
(Middle/Upper class) and the main competition they face (Marriott and
Starwood).
Accounting Analysis
Through research into Hilton’s financial statements, Balance Sheet,
Income Statement, and Statement of Cash Flows, we were able to begin to
dissect where Hilton is trying to position themselves as far as there appearance
to investors is concerned. We evaluated what are their Key Accounting policies,
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where they could be flexible, and the type of strategies they employed when
disclosing things such as Depreciation.
Through this we did not find anything too unusual in how they disclose
their financial information. In general, anything that may have been a concern
was disclosed and/or talked about in their footnotes. For example, there was a
slight discrepancy of $26 Million between the Retained Earnings presented in
their Statement of Cash Flows and the R.E. that we calculated; however, Hilton
discloses in their footnotes that this is due to the exercise of Stock options which
indeed was equal to $26 million.
Hilton utilizes straight line depreciation and FIFO to account for their
inventory which minimizes their tax burden. This causes no reason for us to be
alarmed because this seems to be more of a preference among the managers
rather than an attempt to hide or bury value.
Financial Ratio Analysis
Financial ratios are used to evaluate a firm in several different aspects; its
Liquidity status, its Profitability status and, its Capital Structure status (i.e. the
way in which a firm may finance its assets). Each one of these areas contains
several ratios ranging from its Current ratio (Current Assets/Current Liabilities),
dollar amount of current assets per dollar of current liabilities to its Debt to
Equity ratio (Liabilities/Shareholder’s Equity), this amount of liabilities is financed
by every dollar of Shareholder’s Equity. These ratios prove extremely useful
when it comes to the ten-year forecasting of the company (See Ratio Analysis
section) allowing the investor to see, at a glimpse, the predicted financial
situation of the company over the next ten years. However, due to the
assumptions that are made in forecasting out financial information, the Ratios
can be skewed in one direction or the other. For the purpose of our forecasting
though, we tried to remain more conservative in our assumptions of growth so
as to not grossly overstate future earnings.
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Intrinsic Valuations
An intrinsic valuation involves first coming up with a reliable Ke (Cost of
Equity), Kd (Cost of Debt), growth rates, and a WACC (Weighted Average Cost of
Capital). These numbers find their role in being used as a discount measure for
many of the valuation models. The valuation models are the Discounted Cash
Flows Model, Discounted Dividends Model, Residual Income Model, AEG Model,
and the Method of Comparables. These models allows for us to be able to come
up with our own value for a firm and in comparing our value (Intrinsic Value) to
that of the market, we can then see whether a firm is over, under, or moderately
valued within the market.
Also included in this is an Altman Z-score which helps to constitute the
credit worthiness of a firm. A firm with low credit worthiness will have a score
that is below 1.8 and a company with good credit will have a score around 2.67.
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Overview of Firm Hilton is the proud figurehead brand of Hilton Hotels Corporation and
the most recognized name in the global lodging industry. Although Conrad Hilton
purchased his first hotel in Cisco, Texas back in 1919, they have since grown to
over 500 hotels in cities all over the world. Hilton was officially organized in the
State of Delaware on May 29, 1946. With the chief executive offices located at
9336 Civic Center Drive, Beverly Hills, California.
“Hilton Hotels Corporation is engaged with but not limited to ownership,
management and development of hotels, resorts and timeshare-properties, and
the franchising of lodging properties as well.” (Hilton 2006 10-K) They range
into various business segments of the lodging industry with capacities
“ containing 2,388 properties with approximately 375,000 rooms, of such
properties, leased six hotels, managed 210 hotels owned by others and
franchised 2,054 hotels owned and operated by third parties.” (Hilton 2006 10-K)
From corporate-preferred accounts, internet based guests, leisure tourists,
group- S.M.E.R.F accounts, they aim to gratify the needs of all consumer types,
holding such extensive “hotel brands included within Hilton Hotel Corp. are
Hilton, Hilton Garden Inn, Doubletree, Embassy Suites, Homewood Suites by
Hilton, Hampton and Conrad. They develop and operate timeshare resorts
through Hilton Grand Vacations Company. While also being engaged in various
other activities related or incidental to the operation of hotels.” (Hilton 2006 10-
K) On February 23, 2006 Hilton acquired the lodging assets of Hilton Group plc.
As a result of the HI (Hilton International) Acquisition, they are the largest, by
revenue, and most geographically diverse lodging company in the world, with
nearly 2,800 hotels and approximately 475,000 rooms in 80 countries. The HI
properties that have been acquired consist of 387 hotels with over 100,000
rooms, of which 41 hotels are owned, 194 are leased, eight are partially owned
through joint ventures, 115 are managed and 29 are franchised. Such success
has brought Hilton to the number two spot in the lodging industry.
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Preliminary Data to familiarize self with Hilton (Preliminary Data 1)
Sales volume and growth tables (Firm and competitors) Hilton HLT 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006
Total Assets 8,348B 8,178B 8,242B 8,743B 16,993B
Sales $Mil 3,816 3,819 4,146 4,437 7,013 Sales Growth 5.10% -1.60% 6.00% 46.90% 179.00% Stock Price $12.71 $17.13 $22.74 $24.11 $36.93
Market Cap 14,278B
Marriott MAR 12/29/2002 12/29/2003 12/29/2004 12/29/2005 12/29/2006Total Assets 9,107 8,296B 8,668B 8,530B n/a Sales $Mil 8,415 9,014 10,099 11,550 11,720
Sales Growth -16.90% 6.80% 12.00% 14.40% -0.40% Stock Price $16.44 $23.10 $31.49 $33.49 $48.79
Market Cap 19,291B
Starwood HOT 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006Total Assets 12,259B 11,894B 12,298B 12,454B n/a Sales $Mil 4,588 4,360 5,368 5,977 5,923
Sales Growth -2.20% -2.60% 42.10% 11.40% 5.10% Stock Price $19.36 $29.04 $47.64 $52.09 $66.18
Market Cap 14,030B
Wyndam WYN 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006Total Assets 4,473M 3,783M 2,790M 9,167M 9,118M Sales $Mil 2,241 2,652 3,014 3,471 3,733
Sales Growth -9.00% -5.00% 17.00% 152% 11.90% Stock Price n/a n/a $33.45 n/a $32.55
Market Cap 6,449M
Four Seasons FS 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006
Total Assets 614.3M 733.8M 904.9M 880.2M n/a Sales $Mil 181 221 261 248 n/a
Sales Growth -7.80% 4.70% 38.20% -5.10% n/a Stock Price $28.25 $51.15 $81.79 $49.75 $83.11
Market Cap 3,045M
Gaylord GET 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006Total Assets 2,192.2M 2,577.3M 2521.1M 2532.6M 2658.8M Sales $Mil 414 448.8 750 869 930
Sales Growth 27.40% 8.30% 67.00% 15.90% 11.20% Stock Price $20.06 $29.85 $41.53 $43.59 $56.84
Market Cap 2,316M
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(Preliminary Data 2) Industry Comparison Table
HILTON DIRECT COMPETITOR COMPARISON HLT HOT FS MAR Industry
Market Cap: 14.28B 14.03B 3,045M 19.29B 2.01B Employees: 61,000 110,000 20,887 143,000 6.00K Qtrly Rev Growth (yoy): 100.30% 100.0% -4.9% -0.40% 7.00% Revenue (ttm): 7.01B 522.94M 283.3M 11.94B 457.39MGross Margin (ttm): 32.55% 100.0% 73.8% 13.12% 49.22% EBITDA (ttm): 1.46B 177.90M -39.8M 1.17B 76.71M Oper Margins (ttm): 15.24% 31.17% 17.1% 7.79% 15.67% Net Income (ttm): 470.00M 422.00M -28.2M 734.00M 31.54M EPS (ttm): 1.152 1.884 -0.77 1.445 0.91 P/E (ttm): 32.06 13.9 6.33 33.76 30.72 PEG (5 yr expected): 1.93 3.89 2.8 1.99 1.99 P/S (ttm): 2.04 2.40 5.07 1.62 1.95 HOT = Starwood Hotels & Resorts Worldwide FS = Four Seasons Hotels MAR = Marriott International Inc. Industry = Lodging
-Courtesy of: http://finance.yahoo.com
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(Preliminary Data 3) Stock Price Activity Table
Five Year Analysis
HLT HOT FS MAR GET WYN -Courtesy of: http:// www.morningstar.com
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Industry Overview and Analysis
5 Forces model
An industries’ and more specifically, a companies’, key to survival is influenced by
five factors, 1) Competition, 2) Threat of Potential Entrants and Competitors, 3)
Threat of Substitute Products, 4) Bargaining Power of Buyers, and 5) Bargaining
Power of Suppliers. These five factors are grouped into what is commonly called
the Five Forces Model and is used to specifically target where an industries risk
as well as profit strategies lie. Within these five factors are sub-factors that
further delve into their headings. For example, 1) Competition is evaluated on
sub-areas of Industry Growth, Fixed Costs to Variable Costs, Entry and Exit
barriers, etc. This in turn can be translated, on a micro scale, to a specific
corporation within that industry. What follows is the Five Forces Model laid out
for the Lodging Industry as defined by the NYSE.
1) Competition
Industry Growth
Growth within the industry is steady for the most part; this seems to have
a heavy reliance on the Baby Boomer generation. As more and more of this
generation begin to retire and receive Social Security and retirement benefits, it
places more consumers in society that are willing and able to take more trips and
thus need some form of lodging. If you look at the graph on the next page, the
Lodging industry has indeed recognized a steady increase in growth over the
past 9 years.
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(Top 3 Competitors in Lodging Industry)
-Graph provided courtesy of Yahoo Finance
In addition, with business travel growing world wide, corporations in this industry
gain the opportunity to grow both domestically and internationally. It is notable
here that the attacks of 9-11 greatly affected the Airline industry leading to an
indirect shock to the Lodging industry, however, the market has once again
returned to a state of constant growth, as evidenced in the above graph.
Concentration and Balance of Competitors
Competition in this industry is fairly concentrated at the top, with the Top
3 competitors, Marriott, Hilton, and Starwood, respectively bringing in the most
revenue and thus controlling a fair amount of the industry. They maintain their
rankings by differentiating themselves on quality rather than on price; an issue
that is vital in an industry with numerous competitors. However, a firm in this
industry cannot make any revenue on unused rooms, so often they do
compromise on price to a degree, and this is accomplished through the use of
outside agents such as priceline.com and expedia.com. This differentiation on
quality will be discussed in detail on the next page.
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Degree of Differentiation and Switching costs
As stated above differentiation is vital to a corporation’s success, in not
just the Lodging industry but any industry that is saturated with numerous
competitors. This differentiation can happen in two ways, either on price or on
quality. However, in this industry, as stated above, the corporations that find the
most success differentiate themselves on quality, with the top 2, Marriott and
Hilton, differentiating, to a high degree, on quality. Due to this, the switching
cost for a corporation is extremely high while the switching cost for a consumer
is low. Switching cost is high whether a company is trying to switch to providing
a more quality product or provide on cost efficiency; in the latter way, the high
cost would be based on potential client loss.
Ratio of Fixed costs to Variable Costs
The Lodging industry has a high fixed cost to variable cost ratio. Most of
the corporation’s investments are in their buildings, furnishings, and land. These
are all things that a corporation in this industry must own to run a Hotel. If you
look at the balance sheet of the Top 3 firms in the Lodging industry, you’ll see
that most of the firm’s assets are in their buildings and land. The Lodging
industries variable costs are relatively low but are still high enough to be of
concern. Variable costs in this industry include soap, sheets, even staffing to an
extent. There is also the crossover of certain costs such as electricity, which
would be higher with guests but would still be high regardless of occupancy of
rooms. This brings up the question of whether electricity is, to a degree, a sunk
cost.
Exit Barriers and Excess Capability
The exit barriers in this industry are quite large because of the high start-
up cost associated with starting up a hotel chain. Due to this, it allows firms
such as the Top 3 to maintain quite a hold on the top of the Lodging industry.
The sheer value of the land alone, which is dependent on location, can make
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exiting the industry very costly. However, it could be more costly for a firm in
this highly competitive industry to continue operating despite losing money. In
this scenario, it would cause an exit from the industry to be high but not high
enough to bar exit.
2) Threat of Potential Entrants and Competitors
Economies of scale
This implies that as a firm, in an industry, expands its operations, it
actually begins to decrease it’s per unit cost. In the lodging industry, Economies
of scale is realized especially among the Top 3. This is based on rising rates for
hotel rooms (can be seen as an expansion of operations, i.e. profit growth),
despite relative level costs of maintaining a particular room. However, with
events like September 11th, per unit costs began to significantly increase due to
fixed to variable cost ratio rising; this has begun to level out in the past three
years however with revenues increasing steadily in the past three years, on
average, for the industry.
First Mover Advantage
Location is a very important aspect of the Lodging industry; therefore,
there is a high first mover advantage. To the firm that gets the best locations
goes the highest revenues. For example, the Top 3 in the Lodging industry have
some of the most key locations for the clientele that they serve; for example, Las
Vegas, Los Angeles, New York, all serve home to the Top 3 in the industry. In
addition to location, first mover advantage can include coming up with a
revolutionary idea such as Hilton’s HHonors loyalty program. The ability to come
up with fresh ideas enables a firm in this industry to tap into “un-chartered”
industry niche arenas.
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Customer Relationships
All firms in the Lodging industry, especially those who differentiate on
quality, must establish a customer or clientele base. Those in an industry who
quality differentiates are all going after the same clientele base. Therefore, there
is a first mover advantage in establishing repertoire with potential customers.
Firms do this through several different means, one of which is a loyalty reward
program.
Legal Barriers
Legal barriers in this industry are very few, except in markets such as Las
Vegas where gaming laws and commissions can significantly lag entry into the
industry. However, outside of this, legal barriers find themselves situated in
Building and Zoning codes but nothing that would provide significant entry into
this industry.
3) Threat of Substitute products
Due to the high level of competition in this industry, the threat of
substitute products is high within the same differentiated niches (i.e.
differentiation of quality and cost). Within the quality niche, the Top 3 all serve
as a substitute product, while in the cost niche, there are numerous and various
different types of substitute products to choose from. In addition, there is also
the possibility of camping and RV’s serving as substitute products, though this is
not a major threat to the quality niche of the Lodging industry. However,
relating back to the Customer Relationship section on the previous page, the
threat of substitute products is inversely related to Customer relationship; the
higher the repertoire with clientele, the less likely for them to find a substitute
for a firm’s product.
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4) Bargaining power of Buyers
The bargaining power of buyers in the Lodging industry is low in the
overall scheme of the industry, but high among the Top 3 in the industry. Due
to the most successful firms in the industry falling into the quality niche of the
industry (Top 3), it allows buyers to have a lot of bargaining power to switch
between the Top 3. The inability for a firm to compromise (on factors other than
price) can translate into loss of potential profits among those in the Top 3.
However, in the industry as a whole, the buyer possesses less power as the
switching cost is high for a consumer to switch to a different firm, because they
then sacrifice quality.
5) Bargaining power of Suppliers
Firms in the Lodging industry are customers that any supplier would want
to have, with tremendous amounts of properties, firms are able to maintain a
certain amount of power over their suppliers. When a company makes a
contract with a firm in this industry, they will be able to sell a tremendous
amount of product, due in no small part, to the amount of products that hotels
need to be able to run their day to day operations. This causes firms to have
more power as a buyer and the inverse among the supplier. The Top 3 firms in
the Lodging industry maintain high standards, which must be met, in order for a
supplier to be able to do business with them. According to the Hilton supply
management website, the Number Two firm in the industry, “Suppliers are
evaluated based on criteria including financial stability, delivery performance,
product performance, industry wide reputation, responsiveness in solving
problems, and other salient points. New suppliers are typically given
consideration only when there is a need for a new bid or contract on a particular
product or service.” This means that suppliers are not easily granted a contract,
allowing the Top 3 to have a leverage of power over their suppliers.
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Value Chain Analysis
The Lodging industry is an industry that has enjoyed relative success over
the past few years. Despite the tragedies of September 11th, the Lodging
industry has counted on the virtual certainty that people are going to need some
place to “lay their heads”.
However, most firms in this industry have chosen to differentiate
themselves. This can be seen in the vision statement of the industry’s Number
Two brand Hilton; Hilton creates value by “building on the rich heritage and
strength of our brands…” In the very competitive industry of Lodging, there are
several ways for a firm to differentiate itself. A firm must know its base, an
upper class base will require a firm to differentiate itself on quality and service,
and a firm with a middle lower class base will differentiate itself on cost,
effectively pursuing a cost leadership competitive advantage.
First, a firm has to identify what product or service that a customer values
over other services or its key success factors.
Key Success Factors
In this industry, a successful firm will focus on comfort and superior
customer service. Secondly, the firm must position itself in such a way as to
achieve this product or service in a superior and unique way; in this industry, it
will focus on things such as concierge service, complimentary transportation
to/from airport, 5-star on site restaurants, etc. Most importantly, location is key
to catering to the right clientele (i.e. Las Vegas, New York Times Square). Lastly,
a firm that wishes to differentiate itself must do so at a cost that is less than
what the clientele would be willing to pay for it. Differentiation, especially in this
industry, requires a large investment in Research and Development (hereafter
referred to as R&D), this is due to the fact that a firm must find answers to how
they can effectively do the items that have been listed above.
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On the other side, there is competitive advantage created through cost
leadership. This allows for a firm, especially one in a very competitive
environment, to compete on price. As stated above, this kind of strategy works
well for firms catering to lower/middle class clientele. However, it is important to
note that firms who compete on price, have to sacrifice some quality in order to
maintain lower prices.
Through careful analysis of vision and mission statements of the most
successful firms in this industry, especially the Top 3 and through the analysis of
success through financial statements, it is our opinion that the Hotel industry is
an industry that pursues an overall differentiation competitive advantage.
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Firm Competitive Advantage Analysis
In researching Hilton, we will evaluate the ways and effectiveness that
Hilton has had in implementing the key success factors listed above; in addition,
we will compare Hilton’s competitive advantage to the differentiation strategies
utilized by its competitors to further evaluate how effective Hilton has been to
adapting to a changing climate, post September 11th.
Hilton Corp has maintained their competitive advantages by implementing
key success factors, fine tuned for their industry and more importantly for their
competitive advantage strategy, having been identified previously as
differentiation. By having one of the most powerful brand names in the industry,
Hilton brings a strong competitive presence to the hotel market. They believe
“there is a desire among global hotel owners for strong brands in the full-service,
focused-service, and all-suite segments; and their brand portfolio is wonderfully
positioned to fill that need.” (Hilton.com)
Hilton has made a name for itself with their superior customer service.
Falling in line with the key success factors listed above, Hilton has spent the last
few years positioning itself to become the most dominant brand in the Lodging
industry. Location has allowed Hilton to expand its operations into new avenues
such as casinos and gaming in Las Vegas; in addition, with the addition of
several overseas operations and restructurings, Hilton is truly trying to become a
dominant force in this industry through its branching into new markets.
Technology has also increased customer satisfaction by implementing
new types of entertainment for guests; for example, most high end hotels of
Hilton are putting in flat panel LCD big screen TVs with high-definition. This
quality feature stands out from most competitors and focuses on bringing an “at-
home” feeling of comfort and luxury for the guests.
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Hilton Corp has developed ways of providing its superior product and
service, all-suite segments, and full and focused-service, at a competitive cost.
The guest loyalty program known as, “Hilton Honors” or HHilton focuses on
benefits for the frequent traveler. This program works well with major businesses
that spend a lot of time traveling because they can now get discounts that allows
decreases in their travel expenses. Another cost efficient strategy Hilton
possesses is its ability to offer price matching with the other competitors’ hotels.
This program called, “Their Best Rates Guaranteed” ensures travelers that they
are getting the best deal at the fair market price.
“It is also worth noting that the supply environment continues to work in
Hilton’s favor. There is little new competitive full-service hotel supply being
introduced in the hotel industry’s major markets. This advantage in the market is
definitely a benefit, with the only worries of losing customers to current
competitors known in the market.”
-Hilton.com-2005 Annual Report
Indeed, Hilton pursues a differentiation strategy; however, it is unique in
that Hilton attempts a mix of strategies, providing quality service at the lowest
cost possible. Despite its offering of premium locations and amenities, Hilton is
willing to couple this with programs such as HHilton and “Their Best Rates
Guaranteed”. This unique strategy allows Hilton to create value for its
shareholders and brand name.
Risk Analysis
Since Hilton hotels business relies heavily on properties that are subject to
a lot of environmental risks; any coastal hotel may be subject to hurricanes and
possibly tsunamis. This would cause massive damages or completely destroy the
property causing huge financial set backs. Another risk they must assume now
is that of terrorist attacks. After reviewing some financial information after
September 11th, Hilton noticed a drop off in stock prices (see below chart, Sept.
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20, 2001). This can be attributed to the amount of people that ceased travel
due to the attacks.
(Hilton stock price chart to illustrate 9/11 effect)
-Graph provided courtesy of Yahoo Finance
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Accounting Analysis
Key Accounting policies
A goal of accounting analysis, as it relates to the valuation of a company,
is to first determine the competitive strategy success factors and risks of the
firm. Once these factors and risks have been identified, then this information is
looked at to see how well the firm has managed and utilized them. These key
success factors contribute to the financial future success or failure of the firm as
compared to the industry.
Above, we described Hilton as employing a differentiation strategy, in
which they do not compete on price but rather on quality and service. Due to
this high emphasis on quality, Hilton places much importance on the acquisition
and management of “quality” properties. As of the company’s latest 10-Q report,
Hilton operates over 2,500 properties around the World under several sub-
headings, Hilton, Embassy Hotels, Hampton, Inn, etc. Due to their World-wide
endeavors, Hilton has an interest in the volatility of foreign currencies as it
relates to their properties.
Hilton utilizes operating leases for its properties, see table below:
-Courtesy of Hilton 10-Q Report: 8-Nov-2006 (in millions)
Operating leases allows a firm (as the lessee) to keep the lease off of their
balance sheet and expense the entire lease payment for tax purposes. This
translates to a higher expense on the balance sheet and thus a lower net
income. According to the above table, Hilton has over $12.1 billion in debt with
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approximately 40% of it due after five years. It should be noted however that a
large portion of this debt stems from the acquisition of Hilton International in
2005.
Hilton uses straight line depreciation to depreciate its assets over their
useful life, for buildings, 40 years, and between three to eight years for furniture
and equipment. This depreciation expense “2003, 2004, and 2005 was $270
million, $271 million, and $247 million, respectively.” (Hilton 10-K footnotes 31-
Dec-2005) Hilton’s use of straight line depreciation allows for an even
distribution expenses across the assets useful life.
As mentioned before, Hilton is self-insured for general liability, workers’
compensation, and employee medical and dental insurance coverage. Hilton has
self retention reserves that are for single claims costing between, $250,000 to
$500,000. “The undiscounted amount of Hilton’s self-insurance reserves totaled
$148 million and $146 million at December 31, 2004 and 2005, as accrued based
on the estimates of the present value of claims expected.” (Hilton 10-K) Hilton’s
use of self retention could save money on insurance dollars as long as the
number of claims in the self-retention range does not consistently increase.
Hilton accounts for brands and goodwill in accordance with FAS 142,
“Goodwill and Other Intangible Assets,” which requires that intangible assets
with indefinite lives are not amortized, but are reviewed annually for impairment
(Hilton 2006 10-K). The annual impairment review requires estimates of future
cash flow with respect to the brands and estimates of the fair value of our
company and its components with respect to goodwill. During 2005 goodwill
decreased by 24 million dollars due to 13 million dollars in adjustments to
reserves and 11 million dollars due to asset sales. (Hilton 2005 10-K)
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Degree of Potential Accounting Flexibility Flexibility for Hilton Hotels Corp. accounting policies can vary in many
different degrees. While Hilton complies with SEC and GAAP when they prepare
their financial statements, there are still other choices management can use to
utilize accounting flexibility to optimize gains.
Inventories, which consist mostly of summary goods, account for more
than 42 percent of all inventories, for the kitchen and the bar, are valued at the
lower of cost or estimated net realizable value. From an income approach, FIFO,
first inventory in first inventory out, is a more preferred policy that could be used
to increase net income. This is very significant information to note but the
flexibility is limited due to the fixed cost of these inventories and the only
flexibility is the reporting (FIFO). Also, Hilton has another part of inventory which
is work-in-progress inventory. This relates to the construction of new timeshare
resorts and developments which they record as revenue under the percentage of
completion method. As relates to the key accounting policy of straight line
depreciation even with this being work-in-progress inventory. This can be flexible
to the degree of the amount of revenues they can recognize during
development.
Hilton uses operating leases vs. capital leases on some of their assets.
One reason for this is that using operating leases decreases the amount of tax
expense since the firm has fewer assets on record. Capital leases would offer
some flexibility for Hilton if they decided to buy out the current operating leased
assets. If they purchase those assets instead of renting them, they could show
an increase in net income because of the increase in assets and decreases in
expenses that were from the previous operating leases.
Straight line depreciation is another accounting policy that Hilton chooses
to use that allows for some accounting flexibility. Another route that could be
chosen by Hilton is to use the accelerated method of depreciation; this would
allow for faster write-offs than using the straight line method. In addition, this
24
method would provide a greater tax benefit by showing more expenses in the
depreciation write-off account, but the trade-off would be the reduction in net
income.
Since Hilton has chosen to be self-insured the only thing that is flexible
about using retention is the discount rates associated with the claims and
settlements. The discount rates used to calculate the present value of some of
the past settlements has ranged from 3.0% to 4.25%. These are all numbers
that can easily be manipulated by the manager’s preferences.
Since all of these policy choices can have significant impact on the
reported performance of a firm, they offer an opportunity for the firm to manage
its reported numbers. (Palepu p3-7)
Actual Accounting strategy
Hilton has a very detailed accounting strategy; when reviewing their 10k,
it is very evident that the main priority is for all their policies to comply within
GAAP. Since they tend to always look back on historical experience and relate to
the past with no new significant changes in accounting strategy we can say that
Hilton has conservative accounting practices.
All Items that are reported are in accordance to FAS regulations. To account
for the sale of real estate they follow FAS 66, which means they defer the gains
and realize them over the term of the contract. However, for intangible assets
Hilton chooses to follow FAS 144; this requires them to review items such as
management and franchise contracts to find if carrying value may not be
recoverable. They amortize their leases and contracts using straight line
depreciation over the life of the agreements. When it comes to property that
Hilton has bought, they choose to account for it at the estimated fair value and
take out the accumulated depreciation. This is required to make the proper
flexibility of the asset account available. The concern for Hilton in stretching out
their expenses equally over the periods of useful life (depreciation expense,
25
amortization expense, etc.) further attributes to our perception that Hilton uses
conservative accounting strategies, thus limiting the worry that Hilton is an over-
valued company.
The fact that Hilton is a self insured firm affects what accounting strategies
may be used. This is because of the large amounts of money not spent on
insurance and instead it is retained in accounts of liquid assets that are set aside
for future claims. They spend about $148 million dollars a year on insurance for
their employees. This accumulation leads to heavy reserves, making it important
for them to get outside assistance to make sure that the estimate is correct.
This proves to be an excellent policy to have and limits the “risk” of presenting a
false perception of the welfare of their company.
Quality of Disclosure
The quality of disclosure is a vital dimension determining the accounting
quality of a firm. While the management holds the majority stake in disclosing
the firms truest transactions (being guided slightly by the GAAP rules), it
becomes that much more pertinent to evaluate a firms disclosure relative to the
other powerhouses within the industry. When a firm chooses the aggressive
accounting approach of disclosure, it will ultimately depict the prettiest picture of
its yearly fiscal transactions on the annual 10-K. Whether it may be based on
management compensations, or favorable capital market considerations, this
increases the level of complexity in comprehending the actual value of the firm.
In addition to the fact that the majority of shareholders hold a novice level
involving financial statement analysis, being able to correctly interpret such data
not only is value added, but becomes essentially imperative prior to making
decisions regarding a firm’s standing. As for the lodging industry, none are
strangers to such aggressive accounting tactics.
The Management’s Discussion, disclosed in the footnotes of the 10-K, still
chose an aggressive accounting approach. The industry leader Marriott
26
International Inc. (MAR) advanced to surprising levels above the industry norm
of having a standard yet had a vague approach in identifying any irregularities
that a firm may incur. Meanwhile, the other two of the industry’s leaders, Hilton
Hotels Corp. (HLT), and Starwood Hotels and Resorts (HOT), are almost identical
in their reluctance in revealing any abnormalities.
Due to the fact that all three firms elect such an aggressive accounting
approach, that essentially means that the industry norm is to deter from
adequately disclosing operationally potential bad news. An astounding revelation
that we encountered, was that of Top 3 in the Lodging industry, none chose to
even disclose a Management Discussion and Analysis of the Financial Conditions
section prior to 2003. We have yet to determine if this recent addition is a result
of a new industry regulation or just a restoration of the investor’s faith after the
deterioration of the travel and lodging industry after the bombing of the World
Trade Centers in 2001. Surprisingly, all firms held congruency with relative ease,
despite its involvement amidst multiple business, geographical, and product
segments. “We are engaged in the ownership, management, and development of
hotels, resorts, and timeshare properties and the franchising of lodging
properties domestically and internationally.”(Marriott International, Hilton Hotels
Corp., and Starwood Hotels and Resorts, 10-K 2006) This was the consistent
verbatim exposition phrase within the footnotes on the 10K’s of Hilton, Marriott,
and Starwood alike.
The most pronounced quandary we chanced on was the vigorous channel-
stuffing exhibited by Hilton Hotel Corp. “Notes receivable are reflected net of an
estimated allowance for uncollected amounts.” (Hilton Hotel Corp. 10-K 2006)
Inflating such a receivable or deflating the amount of the estimated allowance
for uncollected amounts, consequently boost reported revenues and net income
for the period. The notes receivable asset accounts depicted on Hilton’s 10-K’s
were; $558M in 2003, $635M in 2004, and $707M in 2005 respectively. While the
estimated bad-debt expense liability accounts were reported as; $68M in 2003,
27
$77M in 2004, and $72M in 2005. Distortions in these figures ultimately results
to large negative adjustments to the next year’s pre-tax income. Total notes
receivable for Hilton actually logged as; $236M in 2003, $350M in 2004, and
$401M in 2005. This very visible deviation reveals Hilton’s “aggressively
accounted” revenues were distorted approximately; $332M in 2003, $285M in
2004, and $306M in 2005.
Their aggressive approach to disclosure proved to be a quite difficult task
in regards to the overall valuation analysis. Overall accounting disclosure is
subject to the discretions of management. Whether it be obtaining favorable
capital market considerations to flatter Hilton’s investors, or intrinsically rooted
within the management’s compensation. They resonated of an ever prevalent
tendency for goal of the management amplify Hilton’s accurate financial
performance and conceal any competitive obstacles that it may be facing. We
concluded that Hilton Hotel Corp.’s quality of disclosure is ranging amongst the
ranks of poor to mediocrity. Due to the sizeable capacity embellished with their
inflated long-term assets resulting in an exaggerated net income for the period,
and the augmented intricacy in obtaining critical information in determining their
factual financial stature.
The following is an investigation of some of the Lodging Industry’s key
financial ratios, which can also be used as central quantitative measures and
indicators that there may be a pronounced presence of “accounting noise” from
management. We will explicitly analyze ratios from the firms in which we
previously referred to as “The Three-Headed Giant of the Lodging Industry”.
28
Screening Ratio Analysis HILTON (HLT)
Sales Manipulation Diagnostics 2002 2003 2004 2005 2006net sales/ cash from sales 1.08 1.07 1.07 1.08 1.09
net sales/ accts rec 12.98 15.52 15.41 14.22 12.39net sales/ inventory 27.45 19.79 28.79 20.26 18.98
Expense Manipulation Diagnostics sales/ assets 0.46 0.47 0.50 0.51 0.50
CFFO/ OI 1.03 0.74 0.83 0.60 0.51 CFFO/ NOA 0.16 0.10 0.16 0.16 0.13
total accruals/ change in sales 2.56 111.33 1.01 1.03 0.12 other employment exps/ sga 6.02 5.78 4.87 5.98 7.52
STARWOOD HOTELS (HOT) Sales Manipulation Diagnostics 2002 2003 2004 2005 2006
net sales/ cash from sales 1.13 1.00 1.10 1.12 1.11 net sales/ accts rec 8.44 9.04 11.14 9.31 10.08net sales/ inventory 17.00 17.58 14.47 21.35 10.56
Expense Manipulation Diagnostics sales/ assets 0.28 .32 0.44 0.48 0.64
CFFO/ OI 1.20 1.00 0.50 1.09 .93 CFFO/ NOA .09 .11 0.08 0.22 .19
total accruals/ change in sales 0.74 0.37 0.58 0.67 n/a other employment exps/ sga 6.72 5.20 13.24 12.93 12.93
MARRIOT HOTELS (MAR) Sales Manipulation Diagnostics 2002 2003 2004 2005 2006
net sales/ cash from sales 1.11 1.14 1.13 1.11 1.10 net sales/ accts rec 10.19 8.28 8.62 10.32 10.89net sales/ inventory n/a n/a 14.50 21.30 10.50
Expense Manipulation Diagnostics sales/ assets 1.02 1.10 1.17 1.35 1.42
CFFO/ OI 0.90 1.12 1.87 1.51 0.96 CFFO/ NOA 0.20 0.17 0.37 0.36 0.78
total accruals/ change in sales 0.11 0.28 0.15 0.13 0.31 other employment exps/ sga 32.77 15.51 14.85 13.60 15.47
SALES & EXPENSE MANIPULATION DIAGNOSTICS
These ratios are screening tools that are used to identify potential
manipulation of accounting numbers by managers. Managers are constantly
concerned with the bottom line and often have quite an incentive to manipulate
these numbers to boost profits. Simply, these ratios are in place to catch
numbers that don’t add up. The sales manipulation diagnostics deal with a firms
29
Net Sales/ Cash from Sales
0.90
0.95
1.00
1.05
1.10
1.15
2002 2003 2004 2005 2006
years
HLT
HOT
MAR
reported revenue and the contributing line items. We “run” these numbers to
find any possible discrepancies between sales and the accounts that play a role
in their reported revenue.
The expense manipulation diagnostics are in place for the same reason; to
catch the possible manipulation of numbers in order to boost revenues. These
ratios however deal mainly with expenses that can be hidden or manipulated to
boost profits. Manipulating expenses for a firm may be as simple renaming
certain business transactions. Basically, they don’t need a complex scheme for
manipulating numbers in order to boost profits. The GAAP in the U.S. are quite
flexible so a firm can portray an accurate picture of its economic standing.
However, some firms may choose to take advantage of these flexible accounting
guidelines.
Sales Manipulation Diagnostics
Net sales/ cash from sales
This ratio is a measure of a firm’s ability to collect cash from sales
transactions. An increasing number may indicate that a firm is relaxing its credit
policy to create more sales. Technically it doesn’t mean a firm is making up sales
it just means they are less likely to collect cash on a high percentage of their
sales. Hiltons’ ratio along with their two top competitors’ ratio over the last five
years is steady and indicates they are able to collect cash from sales at an
acceptable rate.
30
Net Sales/ Accts Rec
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
2002 2003 2004 2005 2006
Years
HLT
HOT
MAR
Net sales/ Accounts Receivable
This ratio goes hand in hand with the previous one and is a further
measure to indicate a firm’s ability to collect cash from sales. Again it also keeps
an eye on the firm’s accounts receivables and credit policies. An increase in this
number can also mean a firm is puffing up sales or unable to collect cash from
those sales. Hilton’s ratio fluctuates slightly over the last five years, but overall
evens out. Hilton is a brand name hotel that historically has a healthy rate of
sales. Indicating to us that these numbers are rather accurate and with out any
material distortions.
Net sales/ Inventory
Another ratio to catch false increases in sales is the net sales to inventory.
A steady and material decline in this ratio may indicate sales are being
manipulated. Essentially if sales are increasing, a firm’s inventory should show a
similar increase to uphold the sales increase. Hilton’s ratio is visibly declining and
they have quite and increase to sales in 2006. This could indicate they are
manipulating sales or simply their product is declining in demand. Looking at
Hilton’s balance sheet, we see their inventory increase at a rate that probably
negates the possibility of sales manipulation- their inventory does increase, just
31
Net Sales/ Inventory
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
2002 2003 2004 2005 2006
Years
HLT
HOT
MAR
not at the same rate sales increased. Given Hilton’s industry and type of
inventory this doesn’t emphatically imply Hilton is manipulating its sales
numbers.
Expense Manipulation Diagnostics
Sales/ Assets
Also known as Declining Asset Turnover; which are sales divided by
assets. This ratio, hence the name can become a concern if it is found to be
declining over a period of four to five years. Specifically, a firm can hide
expenses in this manner by capitalizing expenses and recording them as assets.
Certain expenses incurred during a construction project for example are not to
be capitalized until after completion. It would not be very difficult for a firm to
shuffle expenses around during such a period and seemingly create more profits
during periods of less activity. Generally, hiding expenses in this manner makes
the ratio decline and pushes it below one. Hilton’s ratio is below one, however it
32
Declining Asset Turnover
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
2002 2003 2004 2005 2006
Years
HLT
HOT
MAR
is not declining and it stays at pretty steady rate. Since the majority of Hilton’s
assets are real property their assets are generally going to be pretty high.
Total Accruals/ Change in Sales
This ratio can be a sign of expenses getting buried if total accruals are
declining at the same time the year over year change in sales is increasing. The
bulk of total accruals are generally depreciation and amortization charges. There
are a number of ways to account for these expenses, and accountants can be
pretty creative in doing so all the while staying with in GAAP. Hilton’s total
accruals are declining, all be it at a slow and steady rate. This ratio may very well
indicate they are hiding expenses, especially when you look at their Net
Operating Assets. Which, as mentioned above with a lot of real property they
have a good deal of NOA’s to depreciate. An increase in their PP&E should bring
an increase in depreciation charges. The large spike in the ratio can be
contributed to a dismal increase to sales in 2003.
33
Total Accruals/ Change in Sales
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
2002 2003 2004 2005 2006
Years
HLT
HOT
MAR
Other Employment Exp/ S. G. & A. Exp
The two components of this ratio: Other Employment Expenses & Selling,
General, and Administrative Expenses (SGA) should generally move in the same
direction. By the same notion an increase in sales should also bring a similar
increase in these two items. When these two numbers move in different
directions it is a pretty good indicator that managers could be playing around
with the numbers to hide expenses. Hilton’s ratio doesn’t indicate anything out of
sync and is pretty much “middle of the road” when compared to their
competitors. Furthermore, the two expenses move along together over the past
five years.
34
Other Employment Exp/ SG & A
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
2002 2003 2004 2005 2006
Years
HLT
HOT
MAR
Identifying Potential Red Flags
One of the last steps in analyzing accounting quality is to look for
potential red flags that may point to questionable accounting. This takes into
consideration the previous steps of the key accounting policies used by the firm
and which items managers have a material amount of flexibility or influence on,
and to evaluate how aggressive or conservative the managers are in
implementing these strategies. As discussed above, one of the tools used in this
analysis are the revenue and expense diagnostic ratios that can possibly point
out areas where manipulation of numbers or questionable accounting practices
are used. These indicators however do not automatically assume that funny
things are going on within the company. When these indicators pop up that
means further analysis is needed to determine why these “red flags” are present.
Changes in accounting policy are sometimes necessary to accurately
portray the economic picture of the company. When these changes occur
however there should be adequate disclosure about what the changes are and
why they were implemented. In analyzing Hilton’s 2005 10-k, we did not find any
unexplained changes in their accounting that may imply Hiltons managers were
35
dressing up financial statements. Another potential occurrence that may signify
questionable accounting are unexplained transactions on the balance sheet that
boost profits such as asset sales. Hilton actively seeks to benefit from sales of
certain properties when conditions are right, however these transactions are well
disclosed, and do not seem to be “balance sheet transactions” to simply puff up
revenue. The revenue from the sale of these assets are generally deferred over
the life of a managing contract they agree to with the buyer, as they still have an
interest in these properties (p 34, 2005 10-k.)
Unusual increases in accounts receivable to sales is one of the revenue
manipulation diagnostic ratios that when declining year over year can be a
potential red flag. Hilton’s ratio of sales to accounts receivable while fluctuating
over the last five years was found to have a significant decline from 2004 to
2005. While this may appear to be a red flag sales also increased significantly in
the same time period and we found no changes in their credit policy that would
indicate they were relaxing terms in order to load up this account and boost
assets. Another revenue diagnostic ratio that was found to be declining was the
inventory to sales ratio. Sometimes this can signal that demand for a firm’s
product is slowing down (p. 3-9, Palepu, Healy, Bernard.) However, given
Hiltons’ industry classification and their type of inventory the opposite seems to
be the case; this is likely due to a build up in “work in progress” inventories
which generally indicates an increase in expected sales (p. 3-9, P, H, B.) “Work
in progress” was not reported. However, we did find Hiltons’ management
expects to see and increase in sales particularly in the timeshare segment where
development of resorts and properties is ongoing (p. 25, 2005 10-k.)
An increasing gap between reported income and cash flows from
operating activities was a potential red flag that also caught our attention. This
can mean a firm is recognizing revenues unjustly (ahead of schedule), burying
expenses, or both. This can be easily done and hidden when a firm is
undertaking large construction contracts and employing the percentage of
completion method to recognize revenues (p. 3-10, P, H, B.) Hilton uses this
36
CFFO/ OI
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
2002 2003 2004 2005 2006
Years
HLT
HOT
MAR
method and is constantly engaged in developing properties. We found that
Hilton’s net income increased by approximately 50 percent in 2004 and 100
percent in 2005. During the same time period their CFFO decreased 12 percent.
Hilton is currently allowed to defer selling and marketing expenses under the
percentage of completion method during the construction of projects which
would also aid in the increasing gap between their reported income and their
CFFO. In 2006 under FAS 152 (p. 53-54, 2005 10-k) Hilton will be not be allowed
to defer these selling and marketing expenses, and is something to keep and eye
on in future periods.
Total Accruals to the change in sales is another one of the expense
manipulation ratios that raised a red flag. This can be a problem if total accruals
are declining while the change in sales keeps showing an increase. As mentioned
earlier, this is the case with Hilton over the last five years, and can be a sign that
expenses with regard to depreciation and amortization are being buried.
37
Undo accounting distortions
The next step in the accounting analysis is to recognize the “red flags”
that were identified in the last section that may be intentionally misleading. It
should also be noted again that unusual accounting practices that are found may
not simply be that the company is trying intentionally to hide or misrepresent
information. After analysis of Hilton’s 10-k and many of their competitors 10-k’s
Hilton seems to stealthily report or generalize some information and numbers
that could be used to undo potential red flags that were identified in the above
section. As mentioned earlier, we found Hiltons accounting to be rather
aggressive. Specific areas of aggressiveness where they employed this strategy
were recognizing revenues under the percentage of completion method and the
deferral of certain selling and marketing expenses while developing projects.
Although Hiltons reporting may be vague in some areas and overall aggressive
we do not believe they are guilty of grossly distorting or reporting information
that is materially misleading.
38
Ratio Analysis and Forecast of Financials
The financial statements of a company can be very telling and provide a
more accurate view of their financial condition. However, to realize the impact of
these statements they need to be analyzed and interpreted. That is the purpose
of this section; we will evaluate the financial condition of Hilton and the results of
its operations. We’ll examine trends in their past performance and benchmark it
against individual competitors and industry standards. This is the Trend and
Cross section analyses- a set of ratios that measure the condition of a company’s
liquidity, profitability, and capital structure. We’ll express the implications of
these ratios and attempt to relate them to underlying business strategies. Next,
using this information on their past performance we will forecast each of Hilton’s
basic financial statements for further insight into their financial health and
effectiveness of their strategies.
Trend and Cross Sectional Analysis
Profitability 2002 2003 2004 2005 2006
Gross Profit Margin 46.0% 32.8% 34.3% 37.6% 31.4%
Operating Exp. Ratio 9.9% 10.6% 11.7% 13.7% 11.1%
Operating Profit Margin 24.9% 22.2% 22.6% 23.9% 20.3%
Net Profit Margin 5.2% 4.3% 5.7% 10.4% 7.0%
Asset turnover 0.56 0.57 0.50 0.51 0.50
Return on Assets 2.9% 2.5% 2.9% 5.3% 3.5%
Return on Equity 9.6% 7.3% 9.3% 16.4% 15.3%
39
Profitability Ratios
Amidst the balancing-act between enhancing overall consumer value,
refortifying brand identity, and increasing firm profitability lies Hilton Hotel Corp’s
intrinsic differentiation strategy, to separate the Hilton name from the Industry
and fuse it with consumer quality. Such a commitment requires them to
constantly entertain projects to achieve such a value-added status. Yet to come
upon such glory does have its price. When successfully implementing a
competitive strategy such as Hilton’s, the selling, general, and administrative
expenses, (SG&A), and research and development (R&D) costs will increase in
line with the firms various other operating activities thus affecting overall
operating efficiency and most importantly, profitability. Hilton’s recent acquisition
of HI (Hilton International), the Hilton Group plc, provides insight into the influx
of liabilities and the overall fiscal performance of the firm and the results of its
operations. When determining a firm’s operating efficiency all items pertaining to
the income statement are set as a proportion to sales to easier depict the trend
of certain expense investitures and profit margins.
GROSS PROFIT MARGIN 2002 2003 2004 2005 2006
H L T 46.0% 32.8% 34.3% 37.6% 31.4%
H O T 24% 17.2% 44.22% 45%.43 30.21%
M A R 4% 4.7% 11.3% 11% 14.6%
((Gross Profit/ Sales))
Above is Hilton’s Gross Profit Margin which is a measure of pure revenue,
(sales net of all the cost of goods sold). An increased amount is favorable that
shows peak operations at decreasing normally fixed expenses. Although
obtaining a large increase (45%) in the dollar amount of sales from 2005-2006,
the cost of goods sold (COGS) did not decrease substantially enough for a positive
percentage change. With and increase as big as 45% in sales an increase in
expenses is an industry norm.
40
Operating Exp Ratio
0.00%2.00%4.00%6.00%8.00%
10.00%12.00%14.00%16.00%
2002 2003 2004 2005 2006
Years
H L TH O TM A RInd. Avg.
OPERATING EXPENSE RATIO 2002 2003 2004 2005 2006
H L T 9.9% 10.6% 11.7% 13.7% 11.1%
H O T 11.0% 14.3% 6.2% 6.2% 7.9%
M A R 2.8% 5.8% 6.0% 6.5% 5.65%
((SG&A Expenses/ Sales))
Exacting a competitive strategy for quality is prevalent with the top ranks
of the industry’s leading firms. Although the Marriott holding the top spot of the
industry has done fine job of minimizing their operating expenses, which is a
measurement of how much is expensed for a single dollar of sales. The laggards
of the three headed giant, Hilton and Starwood, seem to be gradually increasing.
Obtaining the number one spot from the principle firm requires larger
commitments than the actual leader.
Whether it may be Starwood’s investments into streamlining its new elite
brand W hotels, or Hilton’s massive acquisition of its International brand lines,
the gradual increase of operating expense justifiable by increased R&D costs as a
41
Operating Profit Margin
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
2002 2003 2004 2005 2006
Years
H L TH O TM A RInd. Avg.
part of SGA explains why Hilton holds highest operating Profit margin on the
industry.
OPERATING PROFIT MARGIN
2002 2003 2004 2005 2006 H L T 24.9% 22.2% 22.7% 23.89% 20.3% H O T 15.1% 11.3% 12.2% 13.8% 14.0% M A R 6.8% 4.2% 4.7% 4.8% 8.3%
((Operating Income / Sales))
The recent year activity 2005 -2006 the increase in sales was
proportionally higher than the total percentage increase in operating expense,
and the operating income, which in turn affect the operating profit margin.
42
Net Profit Margin
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
2002 2003 2004 2005 2006
Years
H L TH O TM A RInd. Avg.
The Net Profit Margin is a key indicator for evaluating Operating
Efficiency. This ratio is a measurement of the percentage of every marginal dollar
of sales that is retained as actual profit.
NET PROFIT MARGIN 2002 2003 2004 2005 2006
H L T 5.2% 4.3% 5.7% 10.4% 7.1%
H O T 9.2% 8.2% 7.4% 7.1% 17.4%
M A R 3.3% 5.6% 5.9% 5.8% 5.0%
((Net Income / Sales))
With increases in the overall dollar amount of sales and net income, due
to inflated operating expenses, Hilton was unable to maximize on such a
productive year. While Starwood whose operating expenses are much more
diminutive than Hilton’s was able to enjoy the industry’s highest actual profit
yield. And the industry leader has held a mixture of consistent competitive
strategies, and operating activities, that result in steady yields.
43
Asset Turnover
00.20.40.60.8
11.21.41.6
2002 2003 2004 2005 2006
Years
H L TH O TM A RInd. Avg.
Determining the revenue productivity of all of a firm’s assets becomes
vital in the profit valuation of a company. How many times can a firm turn a
single asset into profit? Well, this Asset Turnover Ratio derives how much every
dollar of assets can be utilized into a single dollar amount of sales.
ASSET TURNOVER 2002 2003 2004 2005 2006
H L T .56 .57 .50 .51 .50
H O T .31 .31 .44 .48 .64
M A R 1.0 1.1 1.2 1.3 1.4
((Sales/ Totals Assets))
While asset management and operating efficiency both summate to
overall profitability, both can be gauged by considering the profits themselves
and the resources used to produce those profits (productivity.) The return on the
asset ratio is tied to the net profit margin and the asset turnover. Each firm sets
its own benchmark with the idea to increase this variable demonstrating a
positive trend in overall operational management, leading to positive profitability
trends.
44
Since the majority of firms utilize investiture spending on their assets,
analyzing the efficiency of their investment management process is critical to
valuing overall profitability. The asset turnover which is depicted above is the
dollar amount of assets set proportional to its ability to generate a dollar of sales.
This being coupled with a firm’s overall return on sales ratio, or its net profit
margin from above, can effectively demonstrate how much profit a firm can
produce from each dollar of assets invested. (Return on Assets)
RETURN ON ASSETS 2002 2003 2004 2005 2006
H L T 2.9% 2.5% 2.9% 5.3% 3.5%
H O T 2.9% 2.6% 3.3% 3.4% 11.2%
M A R 3.2% 6.1% 7.1% 7.8% 7.1%
((Net Income/ Total Assets))
Although Hilton saw substantial gains in their sales and net income volume, their
actual return on sales was ultimately negatively impacted due to their lack-luster
year effectively managing their operating expenses. This being coupled with the
recent investment into the HI project proved to have declining results for the
firms return on the assets. Hilton’s differentiation competitive strategy, indicates
that they will be bound to higher than average operating (R & D) costs to secure
brand image with the consumer. The key is to ensure that with the increased
investments in the assets, comes a greater or equal return to justify the
efficiency, and correlation firm’s competitive strategy and its management
activities.
45
Return on Assets
-4.00%-2.00%0.00%2.00%4.00%6.00%8.00%
10.00%12.00%
2002 2003 2004 2005 2006
Years
H L TH O TM A RInd. Avg.
RETURN ON EQUITY 2002 2003 2004 2005 2006
H L T 9.6% 7.3% 9.3% 16.4% 15.4%
H O T 9.2% 7.4% 8.7% 8.5% 34.7%
M A R 7.9% 13.6% 15.1% 18.5% 21.0%
((Net Income/ Owners Equity))
As a whole the Profitability Evaluation depicts a harrowing year for Hilton.
Seeing substantial gains in profitability, Starwood can attribute its gains with the
success of its newest “W” Hotel premium brand line, to the highest net profit
margins to offset their increasing operating costs. While the same increase in
operating costs hedged Marriott’s success. Yet Hilton with increases in full
operating expenses with the new HI acquisitions coupled with its use of debt to
primarily finance such investitures, increased liabilities to a point the shadowed
their extensive gains in net income. These gains were the key factor that
contained what otherwise should have been a considerable decrease in the
overall profitability of the owner’s interest in the total assets, the return on
equity.
46
Return on Equity
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
2002 2003 2004 2005 2006
Years
H L TH O TM A RInd. Avg.
In conclusion the concept is simple; the goal is to obtain consumer loyalty
through a definitive competitive strategy. But a good idea can only be set in
place to gain sufficient yields, when operating efficiency is optimal. If the two
deviate, then initial returns to sale will increase at a decreasing rate, being
cannibalized by the operating expenditures to implement the project. Firms
should not undertake projects that require higher investments and produce lower
returns. When the balancing act between the company’s values, profitability, and
consumer value are on the same page and forefront with the management, then
all facets of the firm will see gains, including the owner’s equity.
Liquidity
When firms follow the trend of utilizing debt to finance capital ventures,
they consequently expose themselves to much more market risk. This is where
the universal theory is applied, the higher the risk, the higher the required rate
of return from the investors. Thus, evaluating a firm’s risk-exposure and its
ability to convert its material goods into cash (liquidity) to pay its short-term
liabilities is vital to key in on the actual performance for the period and can give
foresight into the future performance as well. “Liquidity refers to the cash
47
equivalence of assets and the firm’s ability to maintain sufficient near-cash
resources to meet its obligations in a timely manner.” (FSA ratio packet pg. 49)
CURRENT RATIO 2002 2003 2004 2005 2006
H L T 1.11 1.14 1.76 2.42 0.77
H O T 0.53 n/a 0.79 0.79 0.74
M A R 0.79 0.70 0.83 1.01 1.31
((Current Assets/ Current Liabilities))
Above is a look into the lodging industry leader’s performance with their
assets set directly proportional to their liabilities. This current ratio is an
indication of a firm’s ability to cover its current liabilities with the cash realized
from its current assets. Generally, a current ratio above one indicates a firm is
able to do this. Hilton’s current ratio was above one and inclining by a relatively
steady rate until 2006, when it took a steep decline. This was due to a huge
increase (186%) in current liabilities in 2006, current assets also declined slightly
Liquidity 2002 2003 2004 2005 2006
Current ratio 1.11 1.14 1.76 2.42 0.77
Quick asset ratio 0.61 0.37 1.41 2.05 0.5
Accounts Rec. turnover 13.0 15.5 15.4 14.2 12.4
Days Sales Outstanding 27.9 23.5 23.7 25.7 29.5
Inventory turnover 11.2 13.3 18.7 12.7 13.0
Days Supply of Inventory 32.5 27.5 19.3 28.9 28.0
Working Capital turnover 69.4 30.6 8.7 3.6 -14.6
48
Current Ratio
0
0.5
1
1.5
2
2.5
3
2002 2003 2004 2005 2006
Years
H L TH O TM A RInd. Avg.
in 2006 adding to this decline. This essentially says that for every $1 of current
liabilities Hilton has $0.77 of current assets.
When compared to the industry Hilton’s current ratio seems to be in
better shape than some of its top competitors, however the competitors seem to
have a smoother transition from year to year. Within a firm’s quick asset ratio
are their cash, marketable securities, and account receivable.
QUICK ASSET RATIO 2002 2003 2004 2005 2006
HLT 0.61 0.37 1.41 2.05 0.50
H O T 0.42 n/a 0.62 0.70 0.51
M A R 0.46 0.74 0.82 0.66 0.52
((Cash+Mark. Sec.+Accts. Rec. / Current Liabilities))
Hiltons Q.A.R. seems to take another steep decline in 2006. The large
increase in CL in 2006 noted above is the main factor for this sharp decline.
Another factor in the drop is the unusually large increase in cash in 2005, which
49
Quick Asset Ratio
0
0.5
1
1.5
2
2.5
2002 2003 2004 2005 2006
Years
HLTH O TM A RInd. Avg.
shot up the ratio, setting it up for a fall in 2006. Although Hilton’s Q.A.R. of 0.5
in 2006 is potentially troubling, it’s line with the rest of the industry.
A firm’s credit policies are captured within their accounts receivable ratio.
This is a measurement of the number of days that the firm takes to collect on
their receivable accounts. This can be calculated by dividing the amount of the
accounts receivable from the balance sheet into the amount of sales listed form
the income statement.
ACCTS REC TURNOVER
2002 2003 2004 2005 2006
H L T 13.0 15.5 15.4 14.2 12.4
H O T 10.08 9.31 11.14 n/a 8.44
M A R 10.9 10.3 8.6 8.3 10.2
((Sales/ Accts Rec))
50
Accts Rec Turnover
0.0
5.0
10.0
15.0
20.0
2002 2003 2004 2005 2006
Years
Accounts Rec.turnoverHOT
MAR
Ind. Avg.
This is a slight indication that Hilton has probably relaxed its credit policies
allowing extended dates to collect on an outstanding amount. Having a history of
immense channel-stuffing for aggressive accounting procedures, along with the
consistent increase in sales volume year after year, could hint at inflated future
increases in their allowances for bad debt. . An investor should be looking for a
larger number that shows gradual positive progression. This is a crucial liquidity
ratio that demonstrates a firm’s cash equivalence of its assets, and its ability to
pay it’s liabilities in a timely manner. Whenever a firm is truly operating
efficiently, the increased result of this ratio interprets into a shorter Cash
Collection Cycle. Here we see the similarities between Hilton and Starwood, who
are ranked 2nd and 3rd in the industry, hold both similar fluctuating traits with
slight increases in their receivable turnover ratios but have shown a trend to
gradually decline since 2004. While the #1 ranked Marriott, justifies why it is so
and illustrates a consistent incline since 2004.
51
Days Sales Outstanding
0.0
10.0
20.0
30.0
40.0
50.0
2002 2003 2004 2005 2006
Years
Days SalesOutstanding HOT
MAR
Ind. Avg.
DAYS SALES OUTSTANDING 2002 2003 2004 2005 2006
H L T 27.9 23.5 23.7 25.7 29.5
H O T 36.2 39.2 32.8 n/a 43.3
M A R 33.5 35.4 42.3 44.1 35.8
Having seen their A/R turnover decrease over the last few years would
implicitly increase their Holding Period. This longer collection period could
indicate something of a short term liquidity problem. If they do not create
enough cash flow from operations they may be forced to use some portion of
debt to keep up with their operations.
Inventory management is usually mandated by the nature of the business
and its need to obtain an optimal level of operating inventory. The correlation of
inventory to the cost of goods sold is vital in examining the efficiency of not only
liquidity, but inventory management. Inventory turnover is computed by dividing
Inventory into Cost of Goods Sold. It is essentially the dollar amount of held
inventory leveraged against the dollar amount spent to acquire sold inventory.
52
INVENTORY TURNOVER 2002 2003 2004 2005 2006
H L T 11.2 13.3 18.7 12.7 13.0
H O T 13.8 14.6 8.2 11.7 14.4
M A R 15.3 13.1 14.9 18.5 6.4
((Cost of Goods Sold/ Inventory))
From 2005 to 2006 Hilton doesn’t have much of a change in their
inventory turnover. Their type of inventory is mainly real property that over a
short period of time stays fairly constant. So essentially, since our rate of sales
has increased year over year, this implies to a higher cost of goods sold.
DAYS SUPPLY OF INVENTORY
2002 2003 2004 2005 2006
H L T 32.5 27.5 19.3 28.8 28.0
H O T 26.6 24.9 44.2 31.0 25.4
M A R 23.8 28.1 24.4 19.8 56.4
Days Supply of Inventory, also known as the Holding Period is a measure
of the number of days every dollar of inventory is converted into a dollar of
sales. It is computed by dividing 365 by the Inventory turnover ratio that was
mentioned above. After seeing how the ratio is computed you can understand
how Hiltons decreasing Inventory turnover above equates into a longer holding
period.
WORKING CAPITAL TURNOVER
2002 2003 2004 2005 2006
H L T 69.4 30.6 8.7 3.6 -14.6
H O T -3.93 n/a -12.06 -10.03 -9.18
M A R 10.3 8.3 8.7 10.4 11.0
((Sales/ Current Assets – Current Liabilities))
Working capital is CA – CL. A negative WC turnover like Hilton’s has to be
due to a decrease in WC, which is done by decreasing CA or increasing CL. Both
53
Working Capital Turnover
-20
0
20
40
60
80
2002 2003 2004 2005 2006
Years
H L TH O TM A RInd. Avg.
are the case with Hilton, and underscore their low current ratio. Another factor
for the low WC as mentioned above Hilton’s liabilities increased significantly in
2006. This is the primary the cause of the negative WC turnover.
A decreasing Working Capital would normally be a positive sign. However
Hiltons’ decreased by almost 100%; turning negative in less than four years.
Once again Hilton’s underlying problem relates back to their primary policy on
debt financing. Consequently, any increase in CA, sales, and income will be
offset by their heavily leveraged position. This is exactly the case; they had a
substantial increase in sales and an encouraging increase in CA over the last
couple of years. Despite the initially successful years in regards to CA, sales
volume and net income, Hilton could not capitalize because their obligations far
exceeded their returns.
54
CAPITAL STRUCTURE RATIOS
Capital Structure 2002 2003 2004 2005 2006
Debt to Equity Ratio 3.1% 2.7% 2.2% 2.1% 3.4%
Times Interest Earned 1.9 1.7 2.3 3.4 2.7
Debt Service Margin 56.7 1.1 39.1 10.3 1.6
Capital Structure Analysis
The Capital Structure of a company refers to the sources of financing used
to acquire resources for operation and is shown by the Liabilities and Owner’s
Equity section of the balance sheet (FSA and ratios, p55.) This section reveals
how much equity financing to debt financing the firm is using and how they are
able to manage these sources of financing.
DEBT TO EQUITY RATIO
2002 2003 2004 2005 2006
H L T 3.1 2.7 2.2 2.1 3.4
H O T 1.3 1.1 .94 .80 .90
M A R .50 .38 .32 .53 .70
((Total Liabilities / Owners Equity))
The debt to equity ratio helps evaluate the mix of debt and equity that
make up the firm’s capital structure (P,H,B, p.5-17.) It is also an indicator of the
credit risk of a company, which is the possibility that interest and debt
repayment can not be satisfied with available cash flows (FSA and ratios, p55.)
When this ratio gets above 2.5 or 3 it may be a sign of high credit risk and that
the firm is relying too much on debt financing. Not only is Hiltons’ ratio above
this mark, but also well above its industry peers. This is a troubling sign for
Hilton and can be potentially costly to its shareholders (P,H,B, p.5-16.)
55
Debt to Equity
0
1
2
3
4
2002 2003 2004 2005 2006
Years
valu
e - T
imes HLT
HOTMARInd. Avg.
TIMES INTEREST EARNED
2002 2003 2004 2005 2006
H L T 1.8 1.7 2.3 3.4 2.7
H O T 1.7 1.5 2.6 3.4 3.9
M A R 6.6 3.4 4.8 5.2 8.2
((NIBIT / Interest Expense))
Net Income before interest and taxes = (NIBIT). This ratio is a measure
of how easily a firm can meet its interest payments, and indicates the degree of
risk associated with its debt policy (P,H,B, p.5-17.) This essentially means that a
firm’s Operating Income must be sufficient enough to cover the required interest
expenses of operation before there can be profits to the shareholders (FSA and
ratios, p. 56.) Hilton’s decrease from 3.4 to 2.7 is not a good thing, however 2.7
is not a number that seems outrageously troubling to us. It also doesn’t come as
much of a surprise; Hilton relies heavily on debt financing, so their Interest
expense will generally be high - driving down the ratio. As you can see Hilton’s
T.I.E. ratio is noticeably smaller than its competitors. Even though Hilton is fairly
highly leveraged, they seem to be able to keep up with their interest charges.
56
Times Interest Earned
0
2
4
6
8
10
2002 2003 2004 2005 2006
Years
valu
e - T
imes HLT
HOTMARInd. Avg.
DEBT SERVICE MARGIN 2002 2003 2004 2005 2006
H L T 56.7 1.1 39.1 10.3 1.6
H O T 1.2 n/a .92 .63 .62
M A R 7.8 6.6 1.8 55.8 17.3
((Operating Cash Flow / Notes Payable ~ current portion))
The Debt Service Margin of a company measures the adequacy of cash
provided by operations (CFFO) to cover the required annual installment
payments on the principal amount of long term liabilities. Within the capital
structure of a company CFFO should be viewed as a major source of cash that
can be used to retire long term debt. Hilton’s DSM of 1.6 indicates that $1.60 of
CFFO was generated to service each dollar of long term debt that will mature in
2007 (FSA and ratios, p.56.) This substantial decrease in Hilton’s DSM is another
negative impact on their capital structure. Even though CFFO should be used as
a source to pay off long term debt, this large decrease in the DSM equates into
even more pressure on their CFFO to service long term debt (FSA and ratios,
57
Debt Service Margin
0
10
20
30
40
50
60
2002 2003 2004 2005 2006
Years
valu
e - T
imes HLT
HOTMARInd. Avg.
p.56.) To further understand the negative impact of this ratio, consider that their
CFFO increased 34% from 2005. However, it wasn’t near enough to keep up with
the 700% increase in the current portion of their long term Notes Payable.
When considering the steady increase in CFFO over the past years the apparent
volatility of this ratio indicates that Hilton may rely too heavily on debt financing
to sustain operations.
Overall status of Hilton’s Capital Structure
Hilton’s debt to equity ratio of 3.4 for 2006 is potentially troubling in itself.
While the past ratios for 2002-2005 may not set off red flags, it underscores their
heavy reliance on debt financing. It also brings the possibility of increasing their
credit risk to outside lenders. Thus, the negative impact of this ratio is two-fold
since Hilton relies so much on outside sources for financing. This ratio gives us a
broad look at Hilton’s capital structure; tying in TIE and DSM will help break it
down. The TIE ratio indicates Hilton is able to generate enough income to cover
their interest charges. However, this ratio by itself can be misleading because
keeping up with interest payments is only half the equation. When coupling this
ratio with their DSM, Hilton seems to be generating only enough income to keep
the creditors off their back. Cutting it this close in both of these ratios brings the
58
real possibility of not being able to cover their debt payments in full. Hilton
seems to be “living paycheck-to-paycheck.”
In a large corporation such as Hilton we understand the need for, and
potential upside of, debt financing. However, largely due to their highly
leveraged position their overall capital structure is not in good shape. If Hilton’s
reliance on debt financing continues to increase it could mean the start of a
crippling trend. Without getting into the endless quandary of the manager –
owner relationship; we are hard pressed to believe Hiltons’ owners and
executives would let such a trend continue.
Company Growth
SUSTAINABLE GROWTH RATE – (SGR) 2002 2003 2004 2005 2006
H L T 8.18% 5.98% 8.06% 14.73% 13.68%
H O T 7.78% 3.35% 4.90% 4.93% 25.50%
M A R 6.01% 11.72% 13.20% 16.23% 17.80%
{ROE * (1- DPR)}
A company’s Sustainable Growth Rate is computed by multiplying its ROE
by one minus the dividend payout ratio (DPR= cash dividends paid/ NI.) Keep in
mind: (ROE= NI/ OE.) A firms ROE and its dividend payout policy determine the
pool of funds available for growth. The SGR of a company is impacted by every
one of the liquidity, profitability, and capital structure ratios that was discussed
earlier. By linking these previous ratios to Hilton’s SGR we can determine and
further examine the drivers of their growth (P,H,B, p.5-19, 20.) With ROE and
dividend payout policy in mind, seeing Hilton’s NI increase in 2005 (92%) and
2006 (24%) brings the potential for considerable growth. However their DPR for
the last few years remained pretty constant hovering around 10%. So regardless
of the increases to NI they continue to retain a fairly constant rate of earnings.
(This is supported by the small steady growth in owner’s equity.) With that, the
potential for growth that came with the large increases in NI is diminished by
59
S. G. R.
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
2002 2003 2004 2005 2006
Years
Perc
enta
ge HLTHOTMAR
that portion of earnings that went to the shareholders. Simply stated, NI can
either be kept within the company and used to foster growth or paid out to
shareholders in the form of dividends. That’s not to say that paying more
dividends won’t help grow the company, it is however a less certain measure.
The drop in Hilton’s SGR in 2006 was set up by the 92% increase in Net Income
in 2005. We believe this spike in NI might have been better allocated and kept
within the company to possibly curb the downturn in 2006. Overall, a SGR of
13.68% is not an unhealthy or troubling number; it does however appear to us
that Hilton has the potential for a higher SGR.
INTERNAL GROWTH RATE – (IGR) 2002 2003 2004 2005 2006
H L T 2.45% 2.01% 2.51% 4.74% 3.09%
H O T 2.44% 1.15% 1.85% 1.99% 9.27%
M A R 2.40% 5.31% 6.20% 6.80% 6.03%
{ROA * (1- DPR)}
The internal growth rate (IGR) is computed the same way as the SGR,
except ROE is replaced by ROA; (ROA= NI/ TA.) It measures the potential
growth of the company’s own assets. Hilton’s declining IGR in 2006 can be
contributed to a couple main factors: the 89% increase in total assets in 2006,
60
I. G. R.
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
2002 2003 2004 2005 2006
Years
Perc
enta
ge HLTHOTMAR
which decreases ROA; and the fore mentioned 92% increase in NI in 2005.
Again, the increase to NI in 2005 seems to be out of the norm for Hilton and sets
their IGR up for a fall in 2006. Although NI increased by 24% in 2006 it wasn’t
enough to keep up with the increase in assets. This occurrence would drive down
ROA and implicitly their IGR.
61
Forecasting Financials
Forecasting financials is an important and integral part to understanding
the value of a firm. With an inability to accurately look in to the future, we must
use historical data as a means to try to estimate various aspects of a firm. This
process involves making assumptions as to how much a company will grow, or
decline, ten years into the future. What follows are our assumptions that we
made on each of Hilton’s financial statements as well as our analysis of their key
ratios, which are separated into three groups (Liquidity, Profitability, and Capital
Structure). Our overall method on forecasting is called “Growing to Average”
which allows us to have a more conservative approach to forecasting so as to
not grossly overstate any item.
Balance Sheet
The balance sheet forecasting helps us to project the future financial
health of Hilton Inc. We began by forecasting the integral items of the Balance
Sheet, Assets, Liabilities, and Shareholder’s Equity; to do this we took the
average growth rate over the past five years and then divided that number by
ten. By doing this, we were able to grow items at a very conservative rate.
(See below)
For items like Cash, Accounts payable, and L-T Liability Charge we used the
average of the percentages from the common-size income statement. For
example, Cash had a common size of (See Below):
62
We averaged out the common sizes (leaving out 2005 because it is an outlier
and would skew the growth rate higher) and got a number of 2.57%. This
number means that, on average, Cash was approximately 2.57% of Total Assets.
We used 2.57% as a means for forecasting out Cash, as well as other items such
as Accounts payable. This method once again allows for a conservative
approach to forecasting out Hilton’s financials.
We used an Average Growth Rate method to forecast out items such as
PP&E, Accounts and Notes Receivables, and Capital Surplus as these are
numbers that are subject to grow as the company grows. The method involves a
way similar to the way that Liabilities were forecasted except that we took a year
by year growth rate and averaged those. We then grew the line-item by this
amount. This method was not as conservative as the other two but we can
sacrifice some level of conservativeness in order to not grossly understate these
forecasted line items.
We used a basic average of the five years worth of actuals to forecast for
other items like Pre-paid expenses and other current assets, intangible assets,
long term debt, capital leases, and other long term liabilities as well as common
stock. These accounts were forecasted on an average basis because they consist
mostly of steady growth and remain pretty consistent. The inventory turnover
was also used in efforts to forecast inventory projections. Using simple algebra,
we solved for inventory by plugging in the newly forecasted cost of goods sold
over x, the variable for unknown inventory, and set it equal to the inventory
turnover that we established for the past 5 years of actuals. We used mostly
averages in forecasting the balance sheet because we feel like an average
63
growth of the past years will produce the small growth expected in the future ten
years.
Special Consideration for forecast of Retained Earnings
Retained Earnings was a special case in that we did not forecast out R.E.
per say, rather, we used the formula of:
R.E. = Beg. R.E. + Net Income – Dividends paid
This allowed our R.E. to fall inline with our forecasted Net Income with relative
ten year growth steady between the two. For the five year actuals, R.E. grew
by 416%, for the ten-year forecasted, R.E. grew by 320% with N.I. growing by
188% over five year actuals and 98% over ten-year forecasted. However, it is
important to note that Hilton has disclosed that they take the exercise of
Common Stock into account in their R.E. (See Below).
-Courtesy of Hilton 2006 10-K
It is important to note that R.E. will likely not be as high as our forecasted due to
our assumption that none will be reinvested. However, in reality, Hilton would
likely reinvest in new capital such as PP&E or reduction of L-T debt, as the
opportunity cost of just holding cash is high.
“Un-Forecastable” Items
There were line-items that were either unable to be forecast due to being
too volatile or unable to be predicted in a stable manner. Due to this, there is a
discrepancy between Assets and Liabilities + Shareholder’s Equity; this
discrepancy is captured in the red row (See below).
64
This column grows as it nears the end of the ten forecasted years, this growth
represents the “un-forecastable” growth of all the “un-forecastable” line items
spread out over ten years.
65
Balance Sheet
66
Balance Sheet cont.
67
Income Statement
For the income sheet, the assumptions were made very similar to the
balance sheet. First we took the averages of the growth rates of the Net Sales
as expressed below:
We took the 7.92% and used that to grow our Net Sales for the next ten years.
Next, we took the seven other essential forecast-able components (C.O.G.S.,
S.G.A. Expenses, Interest Expense, Depreciation, Non-Operating Income,
Provision for Income Taxes, Minority Interest) and averaged their 5-year
common-size data. For example:
We added 53.99% through 68.57% and divided that number by 5 to get
63.57%. We then made the conservative assumption that COGS would be
approximately 63.57% of N.I. We used this method for all seven essentials as
listed above. We found this method to be conservative in nature due to it being
a steady number across the ten years so as to not overstate N.I. in any period.
Having forecasted out those line items Operating Income and Net Income are
not forecasted per say but rather computed through traditional means having
already forecasted their components. For example, Operating Income is equal to
Gross profit – S.G.A., both of which were forecasted out using the above
methods. This same concept applies to Net Income, allowing for an accurate
68
portrayal of O.I. and N.I. Using this method we found a 98% growth rate over
the entire ten years for N.I.; this is conservative indeed as Hilton had a 188%
over the entire five years of actual N.I. We justify our smaller growth rate
through the fact that firms go through the complete business cycles complete
with periods of significant growth and growth at a declining rate towards the end
of this significant growth (See Below).
-Courtesy of http://hsc.csu.edu.au/economics
69
Income Statement
70
Statement of Cash Flows
The Statement of Cash Flows (hereafter referred to as SCF) is by far the
most difficult of the financials to forecast and it is because of this fact that we
did not forecast CFFI nor CFFF (except for Dividends paid). We instead only
forecasted out CFFO; for a couple of the items on the SCF, we were able to pull
the forecasted information from the other financials. For example, the
forecasted Net Income can be pulled from the Income Statement, which was
$844 (in millions) in 2007 (Year 6). We used this same method for Depreciation.
As far as the other items on the Cash Flow Statement, we used the same
method as used on the Income Statement above, “Growing to Average”. Some
numbers we forecasted to be growing at a negative rate, in line with the concept
that the Cash Flow is a measure of Cash Flows in and out of the company.
Dividends Paid
We forecasted Dividends paid as an average of its % of Net Income, this
method is similar to Cash on the Balance Sheet. We found that, on average,
dividends are 13.46% of N.I. therefore we used this as the basis for forecasting
dividends paid out for all ten years. This conservative approach is important in
that it translates into our valuation models at the end of our analysis.
71
Statement of Cash Flows
72
Cost of Capital Estimation and Analysis
Cost of Equity – (Ke)
The Cost of Equity Capital is related to the market value of the firm’s
equity and can be computed using the Capital Asset Pricing Model (CAPM);
however, there are a number of different ways to compute a firms’ cost of
equity. The CAPM expresses the cost of equity (Ke) as the sum of a required
return on risk less assets plus a premium for systematic risk (beta) (Palepu,
Healy, Bernard, p8-3.) Actual components of the CAPM are: a risk free rate, the
market risk premium (MRP= expected mrkt return – Rfr), and beta.
Ke = rf + B[E(rm) – rf]
In order to compute the firms cost of equity (Ke) we had to first run a regression
with various risk free rates from 2000 through 2007(3 month, 1 year, 5 year, 7
year, and 10 year Treasury Bill rates) in order to find the best estimation of beta.
The best estimation of beta is the regression analysis that yields the highest
adjusted R squared percentage that relates to the type of risk free rate chosen in
the regression. This is why we had to run a number of regressions using
different risk free rates. For the market return we used the S&P 500’s monthly
return data. However we ended up estimating the market risk premium at 6%.
We used 6% because the historical risk premium of 7% is thought to be less
valid today. Recent academic research has found the MRP has declined
substantially and may actually be around 3 to 4 percent (P,H,B, p.8-4.) Since this
is an unresolved matter we simply used a slightly smaller rate.
(Rf) -- Risk free rate
3mnth 1yr 5yr 7yr 10yr 0.04300 0.04208 0.03925 0.03925 0.03933
Mrkt Cap. = MVe
MVa = MVf = MVl + MVe
^(Kd) ^(Ke)
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We ended up using the 3 month Treasury bill rate from 2007 since it was
the most current and because its beta had the highest adjusted R squared
percentage. When we ran the regression using the 3 month Treasury bill rate for
72 months it yielded a beta of 1.105 and an adjusted R squared of 24.45%.
Once we derived these numbers we plugged them into the CAPM model and
estimated Hilton’s Ke at 10.93%. A firm’s estimation of its Ke is important for a
number of reasons. It is used as the discount rate when analyzing potential
future projects, and also measures the required return of an investor. It can also
be used as benchmark for the firm’s ROE. The chart above on the right side
shows the association of the Ke, and how it effects the computation of a firm’s
weighted average cost of capital (WACC).
3 month Regression Analysis months Beta Adj. R^2 Ke
72 1.1052 0.2245 0.1093 60 0.8889 0.1714 0.0963 48 1.0876 0.1361 0.1083 36 1.5152 0.1949 0.1339 24 1.8622 0.2091 0.1547
Cost of Debt – (Kd)
The cost of a firm’s debt is a weighted average and it is estimated using
the respective interest rate associated with each type of debt. Both short and
long term debt are used in the estimation of the cost of capital. Actually
computing the estimate of the cost of debt is relatively simple. We first
computed a weighted average of each necessary liability- with Total Liabilities as
the common denominator. Then multiplied them by their respective interest
rates, which were either found from the St. Louis Fed or in their 10-k. For the
interest rates regarding their short term debt and accounts payable we used the
three month Treasury bill rate of 4.97% (St. Louis Fed.) Other rates regarding
income taxes and long term debt were found in their 10-k. To discount their long
term debt which has a floating interest rate, we used an average of these rates
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found in their 10-k of 7.95%. For their income taxes an interest rate of 5.02%
was used which again was in their 10-k in the tax table. Using this formula we
estimated Hilton’s Kd to be 6.89%. A large portion of Hilton’s debt is long term
and coupled with their ongoing operating lease obligations. Note that the cost of
borrowing money long term brings a higher interest rate. Since Hilton has a lot
of leases on their books and a strong position in long term debt in general, this
likely equates to Hilton’s cost of debt (Kd) being slightly higher than some of its
industry peers.
Estimation of Cost of Debt
Int. Rate source Int. Rate 2006 weight Kd per
item Current Liabilities
Short/Current Long Term Debt *1 4.97% 522 0.04093 0.0020 Income taxes payable 10-k 5.02% 44 0.00345 0.0002 Accounts Payable *1 4.97% 1,736 0.13611 0.0068
L T liabilities and debt Long Term Debt and Capital Leases 10-k 7.95% 6946 0.54461 0.0433 Insurance reserves &other LTL 10-k 4.25% 1276 0.10005 0.0043 Deferred Long Term Liability Charges 10-k 7.65% 2065 0.16191 0.0124
Total Liabilities 12754 1.00000
Kd = 6.89% 0.06891 *1 -- 3-Month Treasury Constant Maturity Rate (GS3M)
Weighted Average Cost of Capital – (WACC)
The WACC can be computed before or after tax. This is simply done by
inserting or removing the tax rate from the equation. The tax in the WACCAT is
accounted for by (1- tax rate.) The WACC is a product of the Ke and the Kd that
was computed above.
Vfirm = Vdebt + Vequity
WACC = [(Vd / Vf)(Kd) * (1-T)] + (Ve/Vf)(Ke)
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The different values of the firm (Vd, Ve, Vf) that are needed to compute the
WACC are in terms of the market value. The chart below was introduced at the
beginning of this section for the Ke estimation, and may help give a clearer
picture of how these market values of the firm are derived.
For our valuation we used the after tax WACC and estimated Hilton’s WACC to be
7.91%. In 2006 Hilton had a substantial increase in liabilities; as was discussed
earlier in relation to some of the Liquidity ratios. The increase in liabilities was
mainly attributable to deferred taxes. In 2006 Hilton had to pay a substantial
amount of taxes that had been deferred over the recent years. This is primarily
the reasons why we feel the after tax method gives us a more realistic idea of
Hilton’s cost of capital.
Hilton’s estimated WACC - (after tax)
Mrkt Cap. = MVe
MVa = MVf = MVl + MVe
^(Kd) ^(Ke)
7.91 % =[(12,754 /27,264)(.0599) * (1-.35)]+(14,510 /27264)(.1093)
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Method of Comparables
To value a company using the Method of Comparables you look for firms
within the same industry that have similar operating and financial characteristics.
You can use a number of different measures of performance for calculations. In
this case we use the: trailing and forecasted Price to Earnings (P/E), Price to
Book (P/B), Dividend to Price (D/P), Price to Earnings Growth (P.E.G.), Price to
Earnings Before Taxes, Depreciation and Amortization (P/ EBITDA), Price to Free
Cash Flow (P/ FCF), and Enterprise Value to EBITDA. Each measure of
performance is an average of the selected comparable firms multiple applied to
the multiple of the firm being analyzed. This method of valuation is widely used
for its simplicity. Unlike the other methods used, it does not rely on multiple year
forecasts about growth, profitability, any cost of capital measure (P,H,B, p. 7-5.)
However, because this method relies on other firms to estimate a value it can be
somewhat erratic. That is the reason we use a number of different performance
measures, to see which one may value the firm in question- Hilton, the closest.
per share multiples HLT
PPS 34.9 forecasted EPS 1.56 trailing EPS 1.48
BPS 9.63 DPS 0.16
ebitda PS 1.68 fcf PS 1.89
Trailing Price to Earnings – (P/E)
To estimate a share price using the trailing P/E measure, we took the
average P/E ratio of the two competitors; Starwood Hotels (HOT) and Marriot
(MAR), then multiplied it by Hilton’s trailing EPS. That yielded an estimated share
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price of $31.5. The estimated share price is less than Hilton’s actual market
share price of $34.9. By this measure Hilton’s actual market share price is
considered to be overvalued.
HOT MAR Ind. Avg. HLT' s (T) EPS Est. share price
trailing P/E 14.82 27.79 21.31 1.478 31.49
Forecasted Price to Earnings – (P/E)
The forecasted P/E measure is computed the same way as the Trailing P/E
method. The obvious difference being we used forecasted P/E multiples for the
competitors and multiplied it by Hilton’s forecasted EPS. This measure yielded an
estimated share price of $33.74. Technically this says Hilton’s actual market
share price of $34.9 is overvalued. However, this measure yielded the closest
estimated share price to Hilton’s actual market price.
HOT MAR Ind. Avg. HLT' s (F) EPS Est. share price
forecasted P/E 23.17 20.08 21.63 1.56 33.74
Price to Book – (P/B)
The Price to Book measure is computed by multiplying the competitor’s average
P/B ratio times Hilton’s BPS. This measure yielded an estimated share price of
$57.2. This measure states Hilton’s actual market price of $34.9 is undervalued.
Keep in mind that we mentioned earlier this method of valuation can be a little
erratic, and give less than accurate estimates.
HOT MAR Ind. Avg. HLT' s BPS Est. share price
P/B 4.9 6.98 5.94 9.63 57.20
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Dividend to Price – (D/P)
The D/P measure is computed slightly different than the previous ones. To
formulate an estimated share price here we divided Hilton’s DPS by the
competitor’s average D/P ratio. This measure yielded an estimated share price of
$29.1. By this measure Hilton’s actual market price of $34.9 is overvalued.
HOT MAR Ind. Avg. HLT' s DPS Est. share price
D/P 0.006 0.005 0.01 0.16 29.09
Price to Earnings Growth – (P.E.G.)
The P.E.G. ratio is simply a company’s P/E ratio divided by the one year
projected growth rate of their P/E ratio. To get an estimated share price for this
measure we took the average P/E ratio of the two competitors and multiplied it
by one minus Hilton’s EPS growth rate, and then we multiplied that value by
Hilton’s EPS. This measure yielded an estimated share price of $29.8. Again, this
states that Hilton’s actual market price of $34.9 is overvalued.
HOT MAR Ind. Avg. HLT' s EPS & EPS growth rate Est. share price
P.E.G. 14.82 27.79 21.31 1.478 ~ (g = .0534) 29.81
Price to EBITDA – (P/EBITDA)
The Price to Earnings Before Interest, Taxes, Depreciation, and Amortization
measure is calculated similar to the P/E measure. The average of the two
competitors P/EBITDA ratio is multiplied by Hilton’s EBITDA per share, and yields
an estimated share price of $21.2. Once again this measure of the comparables
method states that Hilton’s actual market price is overvalued.
HOT MAR Ind. Avg. HLT' s EBITDA ps Est. share price
P/ EBITDA 10.1 15.05 12.57 1.69 21.19
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Price to Free Cash Flow – (P/FCF)
The P/FCF measure is also computed similar to the P/E measure. It takes the
average P/FCF multiple of the two competitors and multiplies it by Hilton’s Free
Cash Flow per share. It gives us an estimated share price of $78.4. Meaning
Hilton’s actual market value of $34.9 would be undervalued. This measure is a
good example of how erratic the Method of Comparables method can be.
HOT MAR Ind. Avg. HLT' s FCF ps Est. share price
P/ FCF 64.2 18.8 41.50 1.89 78.40
Enterprise Value to EBITDA – (EV/ EBITDA)
This measure takes into consideration a firm’s Enterprise Value. Which is their
(market value of equity + long term debt + preferred stock) – cash and
equivalents. It is also computed similar to the P/E measure. We took the average
EV/ EBITDA multiple of the two competitors and multiplied it by Hilton’s EBITDA
per share. This measure once again states that Hilton’s actual market price per
share is overvalued.
HOT MAR Ind. Avg. HLT' s EBITDA ps Est. share price
EV/ EBITDA 13 16.2 15.58 1.69 24.56
Summary of Method of Comparables
You probably noticed something of a recurring theme with each measure of this
method. Six of the eight measures we used to value Hilton under this method
yielded an estimated share price that views Hilton’s actual market price of $34.9
to be overvalued. Throughout our analysis of Hilton we have picked up on some
indicators that their actual market price per share may be somewhat overvalued.
This valuation underscores our belief that Hilton’s current market price per share
is overvalued.
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Intrinsic Valuations
Discounted Dividends Valuation
The Discounted Dividends Valuation is a method that involves forecasting
out future dividends and then discounting them back using a Ke (Cost of Equity)
of 10.93% as a discount rate. This is done for ten years with the tenth year
value becoming the perpetuity; this perpetuity is also discounted back to the
present using the same method above. However, with a perpetuity it is
important to note that a growth rate is taken into account in order to discount
the perpetuity initially back to the tenth year and then back to the present. In
running this model we got a value of $3.04 per share (with 387 million shares
outstanding) causing the firm to be over-valued in our estimation. In addition,
we found this model not to have a great deal of explanatory power as Hilton just
recently began paying dividends.
The above represents the overall valuations sensitivity to a change in the growth
rates and the Costs of Equity. In doing this, none of our results caused the firm
to be under-valued as compared to the Current Market Price of $36.13 as of
4/21/07.
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Discounted Cash Flows Valuation
The Discounted Cash Flows Model is a method that involves forecasting
out future Cash Flows (specifically CFFO and CFFI) and then discounting back
those flows to the present. Much like in the previous section, there is a discount
rate used; however, the difference lies in that the Cash Flows are discounted
back to the present using a WACC (Weighted Average Cost of Capital) of 7.91%,
which was discussed previously. In addition, similar to the Dividends Model, the
tenth year is used as a perpetuity which is discounted back using WACC and the
growth rate to Year Ten and back to the present, using WACC only, after that.
In doing this we got a value of $15.79 per share, causing the firm to be over-
valued by our estimation.
The above represents the sensitivity analysis as it relates to this model and once
again shows no values to cause the firm to be under-valued as compared to the
Current Market Price of $36.13. The Cash Flow Model does possess more
explanatory power than the Dividends Model; however, it is still weak in this
power due to the high volatility of forecasting CFFI.
LR ROE/Residual Income Valuation
The Residual Income Model has the most explanatory power of all the
valuations and is thus the one that analysts rely on the most. This is due to the
“anchor” of EPS (N.I./Shares Outstanding) which diminishes the disparity
between the forecasting of dividends and the forecasting of N.I. The R.I. Model
is unique in that it utilizes both N.I. and dividends in order to find a per share
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intrinsic value of the firm. In addition it uses the BVe (Book Value of Equity) to
help in this valuation. In running this model, R.I. (EPS - Normal Income) is
discounted back to the present using Ke as a discount rate and then the
perpetuity is discounted back using a growth rate and Ke to bring it into Year 10
and then just Ke, after that, to discount it back to the present. In running this
model we got a value of $20.85 which causes the firm to be over-valued
according to our estimation.
The above represents our sensitivity analysis as it relates to this model. Unlike
the previous models, this model give us a value of Ke (11%) and growth rates
(5% and 10%) that will cause the firm to be Under-valued as compared to the
Current Market Price of $36.13.
Abnormal Earnings Growth
The Abnormal Earnings Growth model is computed by using a variety of
factors. After establishing all of your actual and forecasted earnings per
share(EPS), and dividends per share(DPS), you can plug them into the equation.
The previous years DPS is used to multiply with your Ke, or cost of equity
percentage, to give you DRIP then Cumulative earnings are obtained by adding
this DRIP to your current year’s EPS. The normal income is then subtracted from
your found cumulative earnings giving you AEG. The present value factor is
needed to find the proper discount rate to discount your future forecasted AEG’s
back to the present. Once all PV of AEG’s are summed then you can take your PV
of the perpetuity and add them together along with your core EPS, and this
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number gives you your intrinsic value estimation for Abnormal Earnings. In
doing this we got a value of $49.33 which causes the firm to be Under-valued in
our estimation.
The above represents our sensitivity analysis as it relates to this model. Unlike
the previous models, this model give us values of Ke (2.5%, 5%, and 11%) and
various growth rates that will cause the firm to be Under-valued as compared to
the Current Market Price of $36.13.
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Altman’s Z-Score
Altman’s Z-scores 2002 2003 2004 2005 2006
1.66 1.84 2.08 2.42 1.45
The Altman’s Z-score for Hilton Hotels Corporation shows their credit risk.
By having a Z-score below 1.8 throws a red flag and tells analyst that a company
may be heading towards bankruptcy. Since Hilton is an asset based corporation
you can assume the low Z-score can be explained by its large amounts of debt.
The most recent drop from 2005 and 2006 was due to a large asset purchase of
Hilton International where Hilton Hotels Corp. issued a large amount of debt. I
would expect that this Altman Z-score will not have much change in the positive
direction in the near future because of Hilton’s future plans to purchase up to 50
luxury hotels by 2010.
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Analyst Recommendation As analyst we have performed in-depth evaluations and calculations of Hilton
Hotels Corporation as a firm. With this analysis we were able to use different
valuation models to calculate estimated intrinsic value. Our actual price of Hilton
Hotels Corp (HLT:NYSE) as of April 21, 2007, was $36.13 at day closing and had
a 52 week range of $23.19-$38.00. The valuation models showed estimated
values of $3.04 in the Discounting Dividend model, $15.79 for the Free Cash
Flows, $20.85 for the Residual Income and, $49.33 for the Abnormal Earnings
Growth model. The average estimated intrinsic value of Hilton using all of the
valuation models is $22.25, and the estimated intrinsic value of the residual
income valuation model, the most reliable model, is $20.85. If the low estimate
of the Discounted Dividend model and the high estimate of the Abnormal
Earnings Growth model are implied to be outliers and taken out, the average
value is $18.32. With both the averages, with and without the outliers, and the
most reliable intrinsic values being below the actual price, as well as the 52 week
price range, this tells us to believe Hilton is slightly overvalued. Since all of our
valuation models were relatively close estimates within each other as well as
compared to the actual price per share, we can conclude that they are accurate.
With the calculations showing us a distinct overvaluation of Hilton in almost all
valuation models, we recommend no purchase of Hilton stock and to utilize the
opportunity to sell.
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References 1.) http://hiltonworldwide.hilton.com/en/ww/company_info/company_info.jhtml;jsessionid=0EKBNUX2I4SKYCSGBIW2VCQKIYFCVUUC 2.) http://www.morningstar.com 3.) http://www.finance.yahoo.com 4.) http://www.hilton.com (2002, 2003, 2004, 2005, 2006 10-K) 5.) http://hsc.csu.edu.au/economics
A
Appendix 1 (Financials, Ratios, and Valuation Models) Ratios
B
Common Size Income Statement
C
Common Size Cash Flows
D
Common Size Balance Sheet
E
Common Size Balance Sheet cont.
F
Avg. Actual Common Size
G
Discounted Cash Flows Model
H
Discounted Dividends Model
I
Residual Income Model
J
Abnormal Earnings Model
K
Appendix 2 Regression Data
3 month Regression Analysis months Beta Adj. R^2 Ke
72 1.1052 0.2245 0.1093 60 0.8889 0.1714 0.0963 48 1.0876 0.1361 0.1083 36 1.5152 0.1949 0.1339 24 1.8622 0.2091 0.1547
1 year Regression Analysis months Beta Adj. R^2 Ke
72 1.1043 0.2241 0.0863 60 0.8878 0.1711 0.0776 48 1.0874 0.1364 0.0856 36 1.5148 0.1953 0.1027 24 1.8604 0.2094 0.1165
7 year Regression Analysis months Beta Adj. R^2 Ke
72 1.1013 0.2234 0.1053 60 0.8874 0.1716 0.0925 48 1.0973 0.1371 0.1051 36 1.4980 0.1930 0.1291 24 1.8502 0.2089 0.1503
5 year Regression Analysis months Beta Adj. R^2 Ke
72 1.1011 0.2233 0.0943 60 0.8870 0.1714 0.0836 48 1.0949 0.1370 0.0940 36 1.5016 0.1936 0.1143 24 1.8516 0.2090 0.1318
10 year Regression Analysis months Beta Adj. R^2 Ke
72 1.1023 0.2236 0.1165 60 0.8882 0.1719 0.1015 48 1.0993 0.1372 0.1163 36 1.4947 0.1924 0.1440 24 1.8492 0.2088 0.1688
L
Return Series
M
Return Series cont.
N
3 month
O
P
Q
1 year
R
S
T
5 year
U
V
W
7 Year
X
Y
Z
10 Year
AA
BB