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Berko: Check out of half your Hilton shares

By Malcolm Berko

Published: September 24, 2016, 6:00am

Dear Mr. Berko: I bought 1,000 shares of Hilton Worldwide at $29 in March 2015, and the stock’s performance has been a bummer. How will the increasing minimum wage in California and elsewhere affect this stock? Should I sell it, or do you think it’s worthwhile to hold? I hoped this would be a good long-term growth stock with little risk, but I was wrong. If you think I should sell this, what would you recommend? I don’t mind a moderate bit of risk.

— SN, Waterloo, Iowa

Dear SN: I enjoyed meeting Conrad Hilton, founder of the Hilton hotel chain (HLT-$23), in the early 1970s. I found him to be a blowhard, but he had a lot to blow about, and he was a genuine people person. I also enjoy watching Paris, Conrad’s great-granddaughter, whose bold public escapades and antics generate provocative publicity for the hotel group, keeping the Hilton name in klieg lights.

But I’d not care to own HLT, which came public at $20 nearly three years ago, even though Credit Suisse, Thomson Reuters, Value Line and Market Edge have solid “buy” recommendations and Wall Street’s five-year consensus puts HLT’s share price between $35 and $50. With 4,600 properties comprising over 750,000 rooms, plus 1,600 new properties in the development pipeline and 47,000 rooms scheduled to be completed this year, a $50 future price is reasonable. But — and this is an important but — it’s reasonable only if management can maintain its growing net profit margins. This shouldn’t be difficult if HLT has to increase wages to $11 or $14 an hour; Hilton will just raise food and room rates to cover higher wage costs. Vanguard, BlackRock, T. Rowe Price, Prudential, J.P. Morgan, Fidelity and Putnam agree, because collectively they own well over 100 million shares.

And those blue chip institutions are right. HLT’s operating and net profit margins are far superior to those of Hyatt Hotels (H-$70), Wyndham Worldwide (WYN-$68), Marriott International (MAR-$70) and Extended Stay America (STAY-$14). Those four may lack HLT’s momentum, quality of management and long appreciation potential.

However, the distance between HLT’s trading price today and $50 may be lengthened by Christopher Nassetta, HLT’s handsome, beautifully coiffed CEO. Several close contacts at HLT’s McLean, Va., headquarters offered that Nassetta isn’t a people person and doesn’t work well with those under him, which they say is why he quit as CEO of Marriott before coming to HLT. Though that may be true, his record at Marriott was extraordinarily impressive, and I think those comments are sour grapes. Nassetta probably has stepped on some of HLT’s executives’ toes that needed stepping on.

I’m not so sanguine about the lodging market, though most analysts expect the demand for rooms in the U.S. to remain brisk. They cite a growing U.S. economy and higher employment as auguring well for the vacation market and corporate travel. The bright stars from the Street think HLT has good upside potential, but I think they’re wrong as Kong and may have as tall a fall. For the first time, I see Airbnb as a serious competitor in the lodging business.

Sell half of your 1,000 shares of HLT, and use the proceeds to purchase shares of the T. Rowe Price Health Sciences Fund (PRHSX-$64.08), which buys companies engaged in research, development, production and distribution of products and services related to the health care industry. Because consumers have no say in their medical care costs and because Congress pays the bills, the medical industry will always be one of the fastest-growing and most profitable industries in the U.S. And PRHSX, which is a no-load fund, owns Thermo Fisher Scientific, Gilead Sciences, Cigna and other companies with names that are unpronounceable. It’s down 8.3 percent in the past 12 months; however, its three-, five- and 10-year total returns are 20.1 percent, 20.6 percent and 15.8 percent, respectively. And the total return since its inception 21 years ago is 14.5 percent. Those are mighty impressive numbers.

Malcolm Berko addresses questions about stocks. Reach him at P.O. Box 8303, Largo, FL 33775 or mjberko@yahoo.com.

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