Hilton Worldwide (HLT): Putting Your Money to Sleep? Goldman Sachs says No

Earlier today, Goldman Sachs upgraded Hilton Worldwide (NYSE: HLT) to a "Buy" from a "Neutral" recommendation. Analyst, Steven Kent says HLT is not much different from competitors, but Kent prefers the way HLT spends its money.

The analyst tells clients, "In our view, there are not a lot of operational differences between HLT and its lodging peers, so to us stock selection is primarily based on other factors, notably capital allocation."

Hilton Worldwide is engaged in the ownership, leasing, management, development, and franchising of hotels, resorts, and timeshare properties worldwide. The company operates hotels under the brand names of Waldorf Astoria Hotels & Resorts, Conrad Hotels & Resorts, Hilton Hotels & Resorts, DoubleTree by Hilton, Embassy Suites Hotels, Hilton Garden Inn, Hampton Inn, Homewood Suites by Hilton, and Home2 Suites by Hilton; and timeshare properties under the Hilton Grand Vacations brand.

[Related -Give Starwood a Premium Valuation]

As of February 26, 2014, it had approximately 4,000 managed, franchised, owned, and leased hotels and timeshare properties with approximately 665,000 rooms in 90 countries and territories.

Although Goldman considers Hilton the top investment in the lodging space, the stock is barely in the green as we type; however, Kent cites four reasons HLT shares should not lag too much longer. The analyst believes the stock could hit his price-target of $26 because, "Four reasons to buy HLT: (1) clarity of capital allocation: all of HLT's free cash flow is going toward debt pay down, (2) timeshare strategy is underappreciated: HLT has moved asset light while increasing the number of markets it is going timeshare, (3) HLT shares have lagged the past few months: since its first day of trading, shares have increased only 4%, while MAR, HOT, and H have increased 18%, 13%, and 11% respectively over the same period, and (4) buying HLT is a relatively contrarian call: HLT has only 46% Buy ratings while Starwood has 70% Buy/overweight ratings."

[Related -Barron's Summary (CCK, LDK, PAYX, CAH, GEO, CXW, CRN, CREE)]

Since Goldman names HLT versus the industry case as the reason for the change of opinion, let's look at Hilton Worldwide's sales and earnings estimates for 2014 and 2015 to see where HLT shares would price out at the peer group averages.

According to yahoo finance, the consensus earnings estimate for 2014 is $0.62 and $0.78 for 2014. Meanwhile, the aver competitor trades at 25 times EPS. Applying that price multiple to Hilton's projected bottom line gives us potential target of $15.50 for 2014 and $19.50. To hit Kent's $26 target requires a P/E of 33.33 on next year's consensus.

Sliding up the income statement to revenue, the street sees average sales projections of $10.23 billion for this year and $10.93 billion for next year. The typical hotel chain trades at 2.13 times sales. Again, we break out the trusty calculator to determine potential targets of $22.13 and $23.65 for 2014 and 2015, respectively.

Overall: Hilton Worldwide (NYSE: HLT) will have to trade above industry norms for the services company to hit Steven Kent's $26 price-target. Although it is possible, it's also likely that upside will be capped for the same reason Kent mentions, HLT's operations don't differ much from its peers; therefore, neither should its valuation.