Hilton Worldwide Holdings Inc. (NYSE:HLT)

The period under review demonstrates significant fluctuations in economic profit. Net operating profit after taxes (NOPAT) experienced substantial volatility, beginning with a positive value in 2019, followed by a considerable loss in 2020, partial recovery in 2021, and then growth in 2022 before declining slightly in 2023. The cost of capital exhibited a generally increasing trend throughout the period, while invested capital showed a more erratic pattern.

Economic Profit Trend

Economic profit began at a negative US$420 million in 2019, deteriorated sharply to negative US$2,022 million in 2020, and remained negative at negative US$1,109 million in 2021. A positive economic profit of US$103 million was achieved in 2022, but this was not sustained, with economic profit returning to a negative US$101 million in 2023. This suggests a struggle to generate returns exceeding the cost of capital, particularly in 2020 and 2023.

NOPAT Analysis

NOPAT decreased substantially from US$1,213 million in 2019 to a loss of US$279 million in 2020, likely influenced by external factors. It partially recovered to US$614 million in 2021, then increased significantly to US$1,814 million in 2022, before decreasing to US$1,514 million in 2023. The volatility in NOPAT directly impacts the economic profit calculation.

Cost of Capital

The cost of capital increased from 14.31% in 2019 to 15.39% in 2023. This consistent increase in the cost of capital presents a growing challenge to achieving positive economic profit, as a higher hurdle rate must be overcome for investments to be considered value-creating.

Invested Capital

Invested capital rose from US$11,409 million in 2019 to US$12,956 million in 2020, then decreased to US$11,581 million in 2021 and US$11,342 million in 2022. A further decrease was observed in 2023, reaching US$10,493 million. The fluctuations in invested capital, while not as dramatic as those in NOPAT, contribute to the overall complexity of the economic profit trend.

The interplay between NOPAT, cost of capital, and invested capital resulted in a period of inconsistent economic performance. While 2022 showed a brief period of value creation, the overall trend suggests challenges in consistently generating returns that exceed the cost of capital.

Net Income (Loss) Attributable to Hilton Stockholders

The net income exhibited considerable volatility during the observed period. In 2019, the company reported a positive net income of $881 million. However, in 2020, the net income turned negative, recording a loss of $715 million, indicative of significant financial challenges during that year. Subsequently, there was a recovery with net income returning to a positive value of $410 million in 2021. The upward trend continued strongly into 2022, with net income reaching $1,255 million, followed by a slight decrease to $1,141 million in 2023. Despite this recent decline, the net income remained substantially higher than pre-pandemic levels, reflecting an overall recovery and growth trajectory.

Net Operating Profit After Taxes (NOPAT)

The NOPAT followed a pattern similar to net income but demonstrated stronger growth in the latter years. Starting at $1,213 million in 2019, NOPAT decreased to a negative $279 million in 2020, illustrating operational challenges during that period. A recovery phase occurred in 2021 with NOPAT rising to $614 million. This positive trend accelerated markedly in 2022, where NOPAT increased significantly to $1,814 million, followed by a modest decline to $1,514 million in 2023. Despite the slight reduction, the NOPAT values for 2022 and 2023 were well above pre-pandemic levels, signaling improved operational efficiency and profitability post-2020.

Summary of Trends

Both net income and NOPAT experienced a sharp downturn in 2020, likely due to extraordinary external factors impacting financial performance. The subsequent years reveal a consistent recovery, with both metrics surpassing the levels observed in 2019 by a substantial margin in 2022 and 2023. The slight decreases observed in 2023 for both net income and NOPAT suggest a potential stabilization or minor pullback following robust growth. Overall, the company demonstrates resilience and an ability to return to, and exceed, prior profitability levels after a significant dip.

The financial data for the period from December 31, 2019, to December 31, 2023, exhibits notable fluctuations in the provision (benefit) for income taxes and cash operating taxes. The provision for income taxes, expressed in millions of US dollars, shows significant variability over the years. In 2019, the provision stood at a positive 358 million, indicating tax expense. However, in 2020, there was a marked reversal to a negative figure of -204 million, which suggests a tax benefit or credit during that year. This shift likely reflects the impact of extraordinary events or changes in profitability and tax strategy during the pandemic year. In the subsequent years, 2021 through 2023, the provision for income taxes rose steadily from 153 million to 541 million, indicating a return to tax expenses and an increasing tax burden over this period.

Conversely, cash operating taxes demonstrate a consistent upward trend throughout the five-year span. Starting at 474 million in 2019, cash taxes dropped sharply to 130 million in 2020, aligning with the overall decline in tax provision during that year. This decrease likely corresponds to reduced taxable income or enhanced tax reliefs during 2020. From 2021 onwards, cash operating taxes increased significantly each year—from 249 million in 2021, to 539 million in 2022, and reaching 911 million in 2023. The sharp increase in cash operating taxes in 2023 suggests a substantial rise in taxable income or changes in tax payment policies, possibly reflecting improved operational performance or changes in tax laws.

Provision for Income Taxes

2019: Positive tax expense noted at 358 million.

2020: Shift to a tax benefit of -204 million, indicating reduced tax burden or credits.

2021-2023: Progressive increase from 153 million to 541 million, signaling rising tax expenses.

Cash Operating Taxes

2019: Moderate cash tax payment of 474 million.

2020: Sharp decline to 130 million, reflecting reduced cash tax outflows amid challenging conditions.

2021-2023: Steady increase from 249 million to 911 million, highlighting growth in actual tax payments.

Overall, the data reveals that 2020 was an anomalous year with reduced tax liabilities, both on a reported and cash basis, likely influenced by external economic disruptions. Following this period, there was a clear recovery and escalation in both tax expenses provided for and taxes paid in cash, which points to improved profitability and potential normalization of tax obligations. The divergence between provision and cash taxes is less pronounced in later years, indicating closer alignment between accounting tax expense and cash tax outflow.

The financial data reveals several distinct trends regarding the company's debt, equity position, and invested capital over the five-year period.

Total Reported Debt & Leases

The total reported debt and leases consistently fluctuated within a range between approximately $9.1 billion and $11.6 billion. A notable increase occurred in 2020, rising sharply from $9.2 billion to $11.6 billion, likely reflecting elevated borrowing or leasing activities during that year. Subsequently, the debt level declined in 2021 and 2022 but increased again in 2023, settling slightly above $10 billion. This pattern suggests the company managed its leverage actively, possibly in response to external conditions impacting its financing needs.

Total Hilton Stockholders’ Deficit

The stockholders’ deficit exhibited significant volatility across the period, with all reported values remaining negative, indicating persistent equity shortfall. The deficit deepened markedly in 2020, deteriorating from -$482 million to -$1.49 billion, which may denote accumulated losses or increased liabilities. While some improvement occurred in 2021, the deficit worsened again in 2022 and reached its peak negative value of -$2.36 billion in 2023. This trend reflects ongoing challenges in achieving positive equity and may raise concerns about the company's capital structure and financial stability.

Invested Capital

Invested capital showed a rising trend from 2019 to 2020, increasing from $11.4 billion to almost $13 billion. After 2020, there was a steady decline over the next three years, with invested capital decreasing to approximately $10.5 billion by 2023. This decline might indicate asset disposals, reductions in capital expenditures, or changes in operational investments, potentially reflecting a strategic shift or responses to external market pressures.

In summary, the data suggests that the company experienced elevated leverage and equity deficits during the analyzed timeframe, especially around 2020 and onwards. Despite managing invested capital levels, ongoing equity challenges may impact financial flexibility and risk profile. Close monitoring and possible strategic adjustments to improve equity and manage debt levels could be necessary to enhance overall financial health.

The economic spread ratio exhibited significant fluctuations between 2019 and 2023. Initially negative, the ratio demonstrated improvement before declining again in the most recent period. Economic profit moved from negative values to positive and then back to negative, mirroring the trend in the economic spread ratio. Invested capital generally decreased over the five-year period, though with an increase between 2019 and 2020.

Economic Spread Ratio

In 2019, the economic spread ratio was -3.68%. This indicates that the company’s return on invested capital was below its weighted average cost of capital. A substantial decline was observed in 2020, with the ratio falling to -15.61%, suggesting a widening gap between returns and the cost of capital. The ratio improved considerably in 2021 to -9.58%, indicating a narrowing of this gap. A positive value of 0.91% was achieved in 2022, signifying that the company generated returns exceeding its cost of capital for that year. However, this positive trend reversed in 2023, with the ratio decreasing to -0.96%, indicating a return to a position where returns were below the cost of capital.

Economic Profit

Economic profit was negative throughout the period except for 2022. The largest negative value occurred in 2020, at -2,022 US$ millions, consistent with the lowest economic spread ratio observed in the same year. Economic profit improved significantly in 2021 and became positive in 2022, reaching 103 US$ millions. However, economic profit turned negative again in 2023, reaching -101 US$ millions, aligning with the decline in the economic spread ratio.

Invested Capital

Invested capital increased from 11,409 US$ millions in 2019 to 12,956 US$ millions in 2020. Subsequently, a decrease was observed, falling to 11,581 US$ millions in 2021 and continuing to decline to 11,342 US$ millions in 2022. This downward trend continued into 2023, with invested capital reaching 10,493 US$ millions. The decrease in invested capital may reflect strategic decisions to optimize capital allocation or divestitures.

The interplay between economic spread ratio, economic profit, and invested capital suggests a period of financial challenge, followed by a brief period of positive value creation, and then a return to underperformance. The decline in invested capital throughout the later years of the period may be a contributing factor to the observed trends.

The economic profit margin exhibited significant fluctuations between 2019 and 2023. Initially negative, the margin experienced a substantial decline in 2020 before beginning a recovery, albeit with subsequent setbacks. A review of the economic profit and adjusted revenues reveals the drivers behind these changes.

Economic Profit Margin

In 2019, the economic profit margin stood at -4.45%. This indicates that the company’s economic profit was 4.45% less than the total capital employed to generate it. A dramatic decrease was observed in 2020, with the margin falling to -44.72%, coinciding with a significant drop in adjusted revenues. The margin improved considerably in 2021 to -19.59%, suggesting a partial recovery in profitability relative to capital employed. Further improvement occurred in 2022, reaching a positive 1.15%, indicating economic profit exceeded the cost of capital. However, this positive trend was short-lived, as the margin reverted to negative territory in 2023, registering at -0.97%.

Economic Profit

Economic profit followed a similar pattern. Beginning with a loss of US$420 million in 2019, it worsened substantially to a loss of US$2,022 million in 2020. A reduction in the loss was seen in 2021, amounting to US$1,109 million. The company achieved a profit of US$103 million in 2022, but experienced a loss of US$101 million in 2023. The fluctuations in economic profit directly influence the economic profit margin.

Adjusted Revenues

Adjusted revenues decreased significantly from US$9,435 million in 2019 to US$4,522 million in 2020. A moderate recovery was noted in 2021, with revenues reaching US$5,660 million. Revenues continued to increase in 2022 to US$8,946 million, and further increased to US$10,450 million in 2023, surpassing the 2019 level. The strong correlation between revenue changes and economic profit margin suggests revenue generation is a key factor in the company’s financial performance.

The shift from negative to positive economic profit margin in 2022, and the subsequent return to a negative margin in 2023, warrants further investigation. While revenue growth in 2023 was substantial, it did not translate into improved economic profitability, potentially indicating increased costs or a higher cost of capital. The substantial impact of the 2020 downturn on economic profit is also noteworthy.