GROUP 2 - Project #1 (Financial) – Analysis of Two Competing Companies
1. Select two publicly traded U.S. Companies that compete directly with each other.
InterContinental Hotel Group (IHG) (as per http://www.ihgplc.com/)
 Is the world's largest hotel group by number of rooms, 629,700 hotel rooms, 4,303 hotels;
 Operating in nearly 100 countries and territories around the world;
 Seven hotel brands – InterContinental, Crowne Plaza, Hotel Indigo, Holiday Inn, Holiday Inn
Express, Staybridge Suites and Candlewood Suites;
 Three business models – franchising, managing and owning hotels;
 Listed on the London and New York stock exchanges.
IHG today
 We have moved from investing heavily in hotel properties to return to our roots as a hotel
franchise and management company with only a few owned assets.
 This change of focus has led to an industry-leading asset sale program. Since 2003 we have
sold £2.9 (US$4.6) billion worth of property. Many of these hotels have remained under our
brands with management or franchise contracts, thereby creating a future income stream for
IHG.
Our focus
 IHG’s focus is on growing faster by making our brands the first choice for both guests and
hotel owners. We will do this by building the hotel industry’s strongest operating system,
focused on the biggest markets and segments where scale really counts.
Wyndham Worldwide (as from http://www.wyndhamworldwide.com)
Wyndham Worldwide is one of the world's largest hospitality companies across six continents. We
offer individual consumers and business customers a broad array of hospitality products and
services as well as various accommodation alternatives and price ranges through our premier
portfolio of world-renowned brands.
 …the world's largest lodging franchisor, Wyndham Hotel Group, one of three principal
components of Wyndham Worldwide Corporation (NYSE: WYN), encompasses nearly 7,000
hotels representing more than 588,000 rooms in 66 countries on six continents under the
Wyndham®, Ramada®, Days Inn®, Super 8®, Wingate® by Wyndham, Baymont Inn & Suites®,
Microtel Inns and Suites®, Hawthorn Suites®, Howard Johnson®, Travelodge® and Knights
Inn® brands.
 …the world's largest vacation ownership business, as measured by the number of vacation
ownership resorts, units and interests, Wyndham Vacation Ownership includes marketing and
sales of vacation ownership interests, consumer financing in conjunction with the purchase of
vacation ownership interests, property management services to property owners' associations,
and development and acquisition of vacation ownership resorts. (Includes) Wyndham Vacation
Resorts®, WorldMark® by Wyndham or Wyndham Vacation Resorts Asia Pacific.
 …the world's largest vacation exchange network and among the world's largest global
marketers of vacation rental properties. Group RCI offers its members and rental customers
access for specified periods to more than 60,000 vacation properties around the world.
Comprised of more than 30 vacation brands, Group RCI helps deliver dream vacations to more
than four million leisure-bound families each year. The company provides consumers with
access to tens of thousands of vacation properties worldwide, including vacation ownership
condominiums, traditional hotel rooms, villas, cottages, bungalows, campgrounds, city
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apartments, second homes, fractional resorts, private residence clubs, condo hotels and yachts,
enabling them to enjoy unique experiences and explore new places while creating lasting
vacation memories.
2. For the most recent three years for each company, compute ROE and ROA and other
ratios described in exhibit 12-5, p. 626-627.
InterContinental Hotel Group (IHG)
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Wyndham Worldwide
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3. Also prepare common-sized income statements (vertical analysis) for the most recent three
years.
InterContinental Hotel Group (IHG)
Wyndham Worldwide
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4. Make a comparison of the performance and financial health of the two companies in terms
of profitability and risk (liquidity and solvency).
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It appears as though IHG is the more profitable company for the year ending 2008 because they
have higher return on assets, return on equity, and far greater earnings per share. It is true that their
returns are significantly higher, but they are carrying a drastically large amount of debt (debt to
equity ratio is 3,117 for IHG compared to 3.09 for Wyndham). Wyndham has much better liquidity
as indicated by the higher current ratio, more working capital, and higher accounts receivable
turnover over each of the last 3 years.
Although IHG seems to have a distinct advantage over Wyndham in their inventory turnover, it is
not an accurate number to use in this case because of the difference in short-term versus long-term
investments held by each company.
Judging by the financial statements over the past 3 years, IHG is getting better returns for their
investors, but it is mainly because they are financed by much more debt than equity. The rising
debt to equity ratio, along with the falling return on assets, indicates a dangerous trend that could
lead to an overwhelming amount of debt that may ruin the long term health of the company.
As for Wyndham, although they recorded a lost for the year ending 2008, they seem to be much
more stable for the long term compared to IHG. Their higher liquidity and solvency ratios indicate
a better balance of debt and equity, and it makes them much more attractive to obtain financing
through loans and other debt for the future. Though they showed a net loss for 2008, they did show
profits for the previous 2 years, which means the net loss for 2008, could just be a temporary
decline in income due to the current economy.
Overall, Wyndham appears to be the “healthier” company.
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5. Comment on the information found in the cash flow statements for each company, e.g. what
are the primary sources and uses of cash? How stable are the major sources? What activities
consume the preponderance of the cash?
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IHG:
Primary sources of cash:
2006: sales of InterContinental Hotels ($1.14 billion)
2007: borrowing ($1.1 billion)
2008: operating activities ($641 million)
Primary uses of cash:
2006: repurchase of shares ($478 million) and dividends ($1.03 billion)
2007: dividends paid ($1.5 billion)
2008: interest paid ($112 million) and repurchase of shares ($139 million)
Wyndham:
Primary sources of cash:
2006: bonds ($796 million) and capital contributions ($795 million) made up a larger portion than
in previous years, in addition to securitized borrowings ($1.5 billion) and non-securitized
borrowings ($2.1 billion)
2007: securitized ($2.6 billion) and non-securitized borrowings ($1.4 billion)
2008: securitized ($1.9 billion) and non-securitized borrowings ($2.1 billion)
Primary uses of cash:
2006: dividends paid ($1.36 billion)
2007: repurchase of common stock ($526 million)
2008: operating activities (over $1 billion)
After analyzing the Statements of Cash Flows, it looks like Wyndham has acquired a larger portion
of their cash through borrowing than IHG. IHG has borrowed cash themselves, but they have also
obtained cash through operations, and in the case of 2006, by selling some of their InterContinental
brand hotels.
Generally, the most stable source of income would be through operating activities, but that only
happened with IHG in 2008. The selling of capital is not a very good source of income because
once they lost those hotels, they also lost their ability to make new revenue out of them. You would
only want to gain cash by selling capital in case of an emergency, or if you can get very good value
out of them. Regardless, it is something you only want to do once in a while, and it doesn’t
represent a stable source of cash.
Attaining cash through borrowing can be a smart way to earn cash, as long as the company is doing
it responsibly. If the company is not over borrowing, and the business is able to gain larger returns
on their investment than interest they are paying on their loans, borrowing is a stable source of cash.
Getting cash through capital contributions as Wyndham did in 2006 is a stable source of cash in that
the money is added specifically to increase earnings, and they don’t need to be repaid unless the
company makes profits. However, this is also something that can only be done once in a while, and
if the company is not making money, investors will eventually lose confidence in the company.
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Both IHG and Wyndham used a large portion of their cash to pay dividends and repurchase their
own stock, which increases the company’s equity, and builds investor confidence by providing them
with returns.
The large portion of cash used to pay interest by IHG in 2008 is a sign that they have borrowed too
much, and they are using a disproportionate amount of money to pay on loans. They excessive
spending on operating activities by Wyndham in 2008 shows that their revenue for the year was
low, but it is better to be spending money on operating the business than it is trying to pay off loans.
6. Comment on the business (economic), financial, operating and technological risk facing the
Company/ies.
Business
 Competition: Highly competitive market often depending on price & price wars between
competing hotels.
 Advertising: Although there is less business available high cost advertising must continue to
maximize market share.
 Economy of the day: With this current recession are as many people taking vacations? As per
the recent articles both in newspapers & trade magazines indicate there will be less & less
people vacationing.
“Record hotel failures and record hotel closings. The hotel lawyers of JMBM's Global Hospitality Group®
believe that this recession will bring several thousand hotel failures. In contrast to past economic cycles where
most hotels continued to operate through receiverships, foreclosures and bankruptcies, it looks like things may
be different this time. . . . We foresee a record number of hotel "closings" -- situations where the hotels cease
ongoing operations as hotels. Someone "turns off the lights." The hotels "go dark." They are closed down and
"mothballed" because neither the defaulting borrower nor the lender will pay the shortfall in cash necessary to
meet payroll, utilities and other operating costs to keep the hotel open.”
http://www.hospitalitynet.org/news/4042737.html
 Available credit: Both for potential customers & for the hotel firms themselves. Less customer
credit results in less rooms being booked & used. Less hotel credit means less availability of
quick cash from creditors to cover operation costs or property improvements
 Technological Advances: The use of the internet to conduct business & business meetings, also
results in less business travel & less businesses potentially using the hotel conference room
facilities.
 Unions: If unions are not willing to negotiate on costly salaries & / or benefits; more financial
strain is placed on these organizations already experienced decreased business.
Financial
 Available Credit: (As above)
 Decreased cash flow in general: As per the above, with fewer rooms being booked & used, cash
from operations will decrease.
 Decreased cash to cover operation costs: With decreased business & possible decrease credit
available, hotels businesses will find covering every day operations more & more difficult.
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Operating
 Security: Hotels are prone to theft, vandalism, personal violence (drunk patrons fighting), & as
such security is required to minimize these risks.
 Cleanliness: High standards are required to ensure repeat business & the safety of customers,
particularly in regards to infections. With H1N1 highly visible in the news, an outbreak of this
within a hotel will cause significant damage in the public eye.
 Weather: With hotels often in exotic locations (e.g. islands) they are prone to natural disasters
(e.g. hurricanes) that can cause significant damage & take both dollars & significant time to
recover.
 Insurance: In relation to weather, security, cleanliness etc. a high level of insurance is required
to protect the business.
 Taxes: Tax abatement may no longer be an option as local governments experience decreased
tax revenue from other sources.
Technological:
 Network connectivity & security: As the hotel industry is as dependent on computer technology
as any other industry (e.g. credit card sales, room assignments, keys, etc.), a robust computer
network must be in place. With this the customers’ personal information must be protected &
kept confidential. A leak of this information to “internet predators” or “competitors” could
cause significant damage in public opinion & confidence.
All of the risks listed above quantify the sensitivity found in the hospitality industry especially in
resort-class properties. Although none of these problems are new to these companies, the current
downturn and state of the market seems to be much more severe in this industry. An event that
would have amounted to a minor slip up in the past can now be catastrophic in nature. This is due
to the attitude of the consumer combined with the lack of cash/credit flows at this time. In looking
at the 2008 numbers, although the downturn effected essentially the 4th fiscal quarter only, it is
easily visible from the balance sheets and statement of cash flows when compared to the previous
years.
7. Would you invest your personal or corporate assets in either company? Why or why not?
We believe that Wyndham Worldwide would be a smart investment, particularly when comparing it
directly to IHG.
Though IHG has shown more earnings and paid more dividends to its shareholders over the last
three years, the future of the company does not look as positive. The three year trend of
significantly increasing debt combined with the decrease in profits over the same period is a signal
that they probably will not recover from that debt in the near future.
Another factor that the current downturn of the economy has brought to light is the reduction in
business travel due to new communication technologies. Both the new technology and a general
decrease leisure travel demand have hurt the hospitality industry across the board. It is safe to say
that the leisure demand will eventually go back up, but the new communication technologies may
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result in a long term change in the way companies conduct business across the globe. If business
travelers were to decline sharply, IHG would be hurt a lot more than Wyndham because IHG’s
products are more tailored towards business clientele. Although Wyndham does rely on corporate
travel just as much, they also have strong leisure driven products like timeshares, resorts, and
vacation rentals which would help offset the decline if that did occur.
Finally, despite the loss that Wyndham reported for the year ending 2008, at this point it looks as
though this was just a one time decline due to the current economy. In previous years, they have
still shown strong returns, and there is no evidence of a dangerous trend. Also, having a much
larger portion of their assets being financed by equity than debt compared to IHG, they are much
more attractive to financial institutions to issue debt.
With dwindling demand and cash from base operations, which is evident with the analysis of the
financial reports of both IHG and Wyndham Worldwide, investing in the hospitality/hotel industry
is not particularly inviting at this time. However we believe that the drop in demand for vacations
and hotel stays will plateau and increase in the future, resulting in improved financials for the entire
industry, including IHG and Wyndham Worldwide. As per our analysis we believe that at this time
Wyndham Worldwide would be the more judicious investment.
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