I’ve been eyeing shares in InterContinental Hotels Group (LSE:IHG) for my portfolio for some time now. And the stock is moving higher as the company just released a strong-looking trading update.
With revenues up 24%, operating profit up 64%, and a 10% dividend increase, things look good. But with the stock only 2% ahead, is there a buying opportunity in what I think is one of the best FTSE 100 shares for investors to own?
Background
I didn’t see anything in the update for investors to dislike. As I see it, the main reason the stock hasn’t moved by much is that the share price already reflected high expectations for the business.
For one thing, the stock was trading at a price-to-earnings (P/E) ratio of 36, which is high compared to the FTSE 100 average of 10. This indicates the market had been expecting the company to grow much faster than the broader index.
Another is the fact the stock is trading at levels close to its all-time highs. This is despite a weak macroeconomic situation in the UK and the prospect of a recession.
Furthermore, the underlying business is still only recovering its pre-Covid profitability levels. The latest growth mostly brings the company back to where it was before pandemic-induced travel restrictions.
In short, the impressive earnings indicate that InterContinental Hotels Group is getting back to its historic strengths. But the fact its share price is also trading at close to record highs means I don’t see the stock as an obvious bargain despite the strong performance.
A wonderful business
Billionaire investor Warren Buffett always says the best business is one that can grow without needing much additional cash. And IHG certainly fits the bill here.
As a franchise business, the company doesn’t have a lot of costs associated with adding new hotels to its portfolio. The expense of building, maintaining, and running the properties gets left to the operators.
This allows IHG to concentrate on other opportunities, including spending to support its existing brands, developing new ones, and building out its technology platforms. All of this is part of the company’s strategy for future growth.
Those investments only use around 15% of the cash the business generates though. The rest can be used in ways that support shareholder returns – such as a growing dividend and a share buyback programme.
That’s why I think this is a terrific business. It’s asset-light model gives it low capital requirements and this in turn allows it to distribute a large portion of the cash it generates to investors.
A stock to buy?
There’s no doubt in my mind that IHG is a terrific business. It’s one I constantly have on my watchlist and look for opportunities to add the stock to my portfolio.
As Buffett says though, it’s possible to pay too much for a wonderful business. Even after a strong update, the share price still looks high to me.
It’s encouraging to see the company working its way back from the pandemic and probably heading towards greater highs in the future. But I’m looking for a better buying opportunity.
