Should you buy InterContinental Hotels Group PLC (LON: IHG) today?
I'm always searching for shares that can help ordinary investors like you make money from the stock market.
So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.
Today I am looking at InterContinental Hotels (LSE: IHG) (NYSE: IHG.US) to determine whether you should consider buying the shares at 1,770p.
I am assessing each company on several ratios:
Price/Earnings (P/E): Does the share look good value when compared against its competitors?
Price Earnings Growth (PEG): Does the share look good value factoring in predicted growth?
Yield: Does the share provide a solid income for investors?
Dividend Cover: Is the dividend sustainable?
So let's look at the numbers:
|Stock||Price||3-yr EPS growth||Projected P/E||PEG||Yield||3-yr dividend growth||Dividend cover|
The consensus analyst estimate for this year's earnings per share is $1.42 (5% growth) and dividend per share is 70 cents (11% growth).
Trading on a projected P/E of 19.8, InterContinental appears significantly more expensive than its peers in the Travel & Leisure sector, which are currently trading on an average P/E of around 16.3.
Unfortunately, InterContinental's relatively high P/E and low single-digit near-term growth rate give a PEG ratio of around 4, which implies the share price is extremely expensive for the near-term earnings growth the firm is expected to produce.
InterContinental offers a 2.3% yield, which is currently around the same as the sector average. Furthermore, InterContinental has a three-year compounded dividend growth rate of 12%, implying the payout may continue to grow in-line with the payouts of the company's peers.
In addition, the dividend is about two-and-a-half times covered, giving InterContinental plenty room for further payout growth. InterContinental also returned $1bn to shareholders during 2012 through a special dividend and share buybacks.
InterContinental looks expensive, is this justified?
As I say, InterContinental does look expensive for the near-term growth it is expected to produce. On the other hand, I believe InterContinental's share price does deserve a premium over its peers as the company is the largest hotel operator in the world. Furthermore, InterContinental is also the largest international hotel operator in China.
I believe the majority of InterContinental's success is down to the firm's operating structure. You see, InterContinental actually owns only 10 of the 4,500 hotels it has operating under its brands -- the rest of the hotels are either managed or leased.
Furthermore, I can see this low-cost operating structure is key to the group's extremely profitable business. Indeed, in the three months to September 2012, InterContinental reported a solid 30% gross profit margin. In addition, high cash generation has allowed the group to reduce its net debt from $644m down to $472m during 2012.
Nonetheless, InterContinental shows no sign of slowing down. As of September 2012, InterContinental had a pipeline of 165,000 rooms under construction, which would increase the current room count by around 20%.
However, despite the bright outlook for InterContinental, I believe the current valuation is too high for the low near-term growth the company is expected to produce. So overall, I believe now does not look to be a good time to buy InterContinental Hotels at 1,770p.
More FTSE opportunities
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In the meantime, please stay tuned for my next verdict on a FTSE 100 share.
> Rupert does not own any share mentioned in this article.