On Friday, Morgan Stanley (NYSE:MS) adjusted its financial outlook for H World Group Ltd. (NASDAQ: HTHT), reducing the stock's price target to $56 from $60, while reaffirming an Overweight rating. The revision follows H World Group's first-quarter 2024 results, which surpassed expectations primarily due to stronger performance in leased and owned hotels' revenue per available room (RevPAR) and an increased franchise and management (F&M) revenue take rate.
The firm has raised its L&O RevPAR forecast by 3% for 2024 and the F&M take rate by 6-7% for both 2024 and 2025. Consequently, Morgan Stanley's total revenue predictions for H World Group have increased by 3% for 2024 and 2% for 2025. This enhancement in revenue projections has a direct positive impact on the company's adjusted EBITDA and earnings per share (EPS), with EPS estimates for 2024 and 2025 each climbing by 6%.
The updated valuation also considers a higher weighted average cost of capital (WACC), which has been raised from 9% to 10.5%. This change reflects the widening yield spread between US Treasury and Chinese government bonds. The increase in WACC has been applied to both Chinese hotel companies listed in the United States that Morgan Stanley analyzes.
Despite the improved earnings outlook, the increase in the discount rate has led to a 7% decrease in the price target for H World Group's shares. The firm noted that there were no changes to the bull or bear case values for the stock. This price target adjustment reflects a balance between H World Group's strong operational performance and the broader financial market conditions affecting valuation.
InvestingPro Insights
As Morgan Stanley revises its financial outlook for H World Group Ltd. (NASDAQ: HTHT), real-time data and InvestingPro Tips offer additional context for investors considering the company's stock. The market capitalization of H World Group stands at $11.31 billion, with a price-to-earnings (P/E) ratio of 25.53, reflecting investor sentiment and market valuation of the company's profitability. Adjusted for the last twelve months as of Q1 2024, the P/E ratio is slightly lower at 22.44, which may be appealing for investors looking for growth at a reasonable price.
InvestingPro Tips indicate that management has been aggressively buying back shares, which can be a signal of confidence in the company's future and often provides support for the stock price. Additionally, the company is recognized as a prominent player in the Hotels, Restaurants & Leisure industry and has been profitable over the last twelve months. These factors, combined with a high shareholder yield and the ability of cash flows to sufficiently cover interest payments, provide a positive outlook for H World Group's financial health.
Investors should note that while short term obligations exceed liquid assets, the company is trading at a high Price / Book multiple of 6.67, which might suggest a premium valuation. The recent stock price has taken a hit, with a one-week total return of -12.78%, which could present a buying opportunity for those who believe in the company's fundamentals. For those seeking further in-depth analysis, there are 10 additional InvestingPro Tips available at InvestingPro that can provide more nuanced guidance. To access these insights, consider using the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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