NHS HOTELS FINANCIAL ANALYSIS

NHS Hotels Financial Analysis



Abstract

This report is a financial analysis of the NH Hotels hotel company from the viewpoint of financial analysts wishing to purchase shares in the hospitability-leisure business. Along with NH Hotels, we chose two American hotel chains, Hilton and Marriott, and one European chain, Accor as industry alternatives. The global travel industry has bottomed out since the dreadful years of 2007 and 2008 and is improving. NH Hotels financial rations do not show great improvement over the past two years, but suggest a solid company that can survive in difficult economic conditions. Public explanations of strategy show that the company is committed to improving these ratios along with general operating efficiency. Comparison with companies in the same market sector, combined with the trends in market improvement suggest NH Hotels' relative financial health make it a strong candidate for acquisition, but the stock price will continue to under-perform its rivals. Further analysis will be necessary to identify the possible acquisition price and the relation to the current share price.

NHS Hotels Financial Analysis

Introduction

The years 2007 and 2008 were very difficult for both travel industry and global equity markets. In light of these developments, we believe a hotel business with a strong capital structure and cash flow would be in an excellent position to wait out the economic downturn and be in a position to take advantage of weaker rivals and any economic recovery. In terms of fundamental analysis we are looking for a moderate gearing ratio, sustainable liquidity ratio, and moderate to good ROCE and asset utilization ratios.

Our analysis of NH HoteLs share price started with the articulation of a desired set of fundamental financial ratios using macro level information about the hotel and the leisure industry and the global equity markets. We then compared NH Hotels and competitors with these targets to estimate future performance and to identify strong performers within the sector. We used the annual reports of all companies analyzed for 2008 and 2007 as well as more recent information mainly from the Internet and equity markets for 2003 data.

INDUSTRY BACKGROUND

Europe has long been a popular place for tourists which has helped the hotel industry flourish. However, when the first war on Iraq broke out the vulnerability of this industry to the world economy was starkly illustrated. However in the second half of the 1990's the world economy had recovered, the hotel business picked up again and sales in the late 1990's broke all previous records (Robertson MJ, Broyles RW, Khaliq A. 2004).

To accommodate these tourists European hotel chains have been and still are building more hotels. The chains do this to gain market share and to secure European wide coverage. Due to the clear advantages of scale, a few dominant companies control the European market as smaller players merge with the bigger ones or are pushed out the market completely. (Miller, D., and M.-J. Chen. 1994)

However big the companies have become, they all felt the economic bubble ...