Hilton Worldwide (HLT) and La Quinta Holdings (LQ) reported 3Q earnings in line with current expectations.  HLT expectations had come in slightly as concerns about the health of the lodging industry grew over the summer and early fall.  HLT’s results were fairly good against the lowered expectations and the company’s growth profile appears to be at the higher end of lodging industry peers.  HLT guidance for 4Q15 matched street expectations but seem likely to be near the low end of the range provided given commentary on the conference call about weak transient business in October.

LQ reported in line with the significantly reduced guidance the company provided when it announced disappointing 2Q15 results in July.  LQ maintained the lowered full year 2015 guidance from July.  This indicates stabilization in operating fundamentals, albeit at a materially lower level than previously expected.  On the 3Q15 conference call, the interim CEO indicated that the company is likely to undertake actions to improve perception of the brand.  These could include hotel renovations advertising, increased customer service and digital investments.  Against what appears to be still weak demand for LQ properties, these investments seem likely to pressure 2016 earnings estimates.  Management is showing confidence in the business by accelerating share repurchases and is exploring alternatives to realize value from the asset base of owned hotels.  One group of 24 hotels is being sold already.  However, on the call, management appeared cautious about opportunities for a larger scale financial restructuring.  Short of an outright sale of the company, Northlake no longer sees financial engineering as providing as much support to the stock as previously thought.  Given this view and the likelihood that 2016 is a transitional year of investment in the brand under a new, as yet unidentified CEO, we have decided to sell LQ for Northlake clients.

It makes sense to hang onto HLT even against challenges faced by the hotel industry including rising room supply, the growing impact of Airbnb, and reduced international travel to gateway U.S. cities.  HLT has very strong management, a shareholder friendly approach to capital allocation and potential financial engineering, and most importantly, a great set of brands that is well positioning to navigate near-term challenges to the lodging industry.  3Q15 results and 4Q15 guidance show HLT’s top of the industry performance that merits patience given long-term value potential.

HLT is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.