Playa Hotels & Resorts’s 38.4% return over the past six months has outpaced the S&P 500 by 31.8%, and its stock price has climbed to $12.04 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Playa Hotels & Resorts, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Despite the momentum, we're sitting this one out for now. Here are three reasons why there are better opportunities than PLYA and a stock we'd rather own.
Why Do We Think Playa Hotels & Resorts Will Underperform?
Sporting a roster of beachfront properties, Playa Hotels & Resorts (NASDAQ:PLYA) is an owner, operator, and developer of all-inclusive resorts in prime vacation destinations.
1. Weak RevPAR Growth Points to Soft Demand
We can better understand Travel and Vacation Providers companies by analyzing their RevPAR, or revenue per available room. This metric accounts for daily rates and occupancy levels, painting a holistic picture of Playa Hotels & Resorts’s demand characteristics.
Playa Hotels & Resorts’s RevPAR came in at $252.12 in the latest quarter, and over the last two years, its year-on-year growth averaged 12.1%. This performance slightly lagged the sector and suggests it might have to invest in new amenities such as restaurants and bars to attract customers - this isn’t ideal because expansions can complicate operations and be quite expensive (i.e., renovations and increased overhead). 
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Playa Hotels & Resorts’s revenue to drop by 2.3%, a decrease from its 8.2% annualized growth for the past two years. This projection is underwhelming and implies its products and services will face some demand challenges.
3. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Playa Hotels & Resorts historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 2.9%, lower than the typical cost of capital (how much it costs to raise money) for consumer discretionary companies.
Final Judgment
Playa Hotels & Resorts falls short of our quality standards. With its shares beating the market recently, the stock trades at 23× forward price-to-earnings (or $12.04 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. We’d recommend looking at ServiceNow, one of our all-time favorite software stocks with a durable competitive moat.
Stocks We Like More Than Playa Hotels & Resorts
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