Hilton Hotels: A New Lease on Life

If you've had trouble booking a room at the inn or experienced sticker shock for a night in a bed, then you'll understand the case for Hilton Hotels (symbol HLT). The venerable hotel chain has a new lease on life.

First, Hilton just remarried. The U.S. company acquired Hilton International of Britain -- a company spun off by Hilton USA 40 years ago -- for nearly $6 billion. The purchase brings with it the Conrad luxury chain and a strong hostelry presence in high-growth overseas markets such as the Far East. Sam Lieber, who runs Alpine U.S. Real Estate Equity fund, notes the acquisition will dramatically boost the foreign share of Hilton's revenues from the low single digits to 29%, about the same level as for more-worldly Marriott.

But Lieber, who has made Hilton the largest holding in his fund, also loves the company for its domestic business. Several years ago, a combination of recession, 9/11 and the SARS virus clobbered the travel industry. Construction of new hotels ground to a halt for years. Since 2003, demand for hotel beds has come roaring back, but Lieber doesn't think supply of new hotels will increase much until 2008 (it takes three to five years to plan and erect a big-city hotel). Result: Hotels like Hilton have jacked up room rates, without increasing overheads such as labor. Last year the lodging industry's average revenue per room available surged 12% and should rise another 8% to 10% this year.

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Lieber also likes Hilton's longer-term story, noting that the chain is migrating to the asset-light, high-return Marriott model. Hilton will gradually sell Hilton-owned properties and expand its fee-based hotel-management and franchising businesses (the group includes the Hampton Inn and Doubletree brands), which sport a higher return on invested capital. Lieber thinks Hilton can raise its return on equity, 14%, to a Marriott-like level of 19%.

Trading hands at $25 a share, Hilton's stock sells at a 20% to 25% lower valuation than that of its competitors, according to the Alpine fund manager. If his thesis is correct, Lieber sees the stock moving into the low $30s range within a year and the high $30s within two years. Founder Conrad Hilton would be pleased.

--Andrew Tanzer