NUR March 2021 Edition

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Quick take on Iberian Markets The (un)ethical dilemma of short selling


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Extra: Basics of Company Valuation Business Deep Dive: Hilton Worldwide Holdings Inc.



NIC-UD Fund: Monthly Performance

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Quick Take on Iberian Markets Czech Republic overtakes Spain in GDP per capita. In the 1990s, the Czech Republic was emerging from communism and it was producing just twothirds of the wealth that Spain was. But in three decades, it has managed to beat the Spanish economy in terms of GDP per capita at PPP. Not only that, since the financial crisis of 2008, the Spanish GDP has been diverging from more advanced European economies like Germany. In the recently released Eurostat preliminary flash estimate for the Q4 of 2020, Spain’s GDP was down by -9.1% YoY, the worst in the EU. Spanish Government is preparing a crackdown on Gig Companies. As the debate on whether Gigworkers in companies like Uber and Glovo should be classified as workers sweeps around Europe, strict labour law changes are being put forward in Spain. The regulation in question would force these companies to formally employ their couriers, meaning an entitlement to work benefits like social security, unemployment benefits, paid leave in case of sickness, among others. Companies warn that it could significantly diminish job opportunities for potential gig-workers as well as impact the business availability and service. Spanish Central Bank, Banco de Espanha (BE) calculates an excess of corporate debt up to €20bn. The research made by the BE estimates that the necessary relief viable companies will need to avoid insolvency is ranging from €7bn to €20bn, focusing only on viable companies which are highly in debt due to the pandemic. The BE’s governor stressed out the importance of minimizing banks’ exposures in case of mass insolvencies. The governor recommended the continuation of stimulus packages as well as debt restructuring by extending default requirements and deadlines. In addition, the governor also suggested direct aids for SMEs. The Portuguese government says financing of its pandemic recovery and resilience plan will include €13.9bn in EU grants and €2.7bn in loans. The prime minister António Costa has stated that a slice of €4.6bn will be “directly reserved for the private sector”. The plan involves around 36 reforms and 77 investments, covering 3 defined dimensions: Resilience, Social Transition and Digital Transition.

António Gouvêa Portuguese 10Y Bond Yield quadruples as inflation fears grow. Following the Bond Rout throughout the international sovereign bond market, the Portuguese 10-year government bond yield, which was near negative grounds, increased over 0.2% during the month. This sell-off comes as investors fear rising inflations rates and the consequent reversal in the current expansionary monetary stance of global central banks. Tourism pushes IBEX 35 on an upward route. The main Spanish index made significant gains appreciating 6% to 8200 points. The move was mainly carried by tourism and banking as the UK government, the main source of tourists in Spain, plans to lift travel bans. Melia Hotels International, International Consolidated Airlines and Repsol were among the top performers. Galp reported losses in the amount of €42m in terms of adjusted net income. In 2020, its EBITDA decreased 34%, the majority of the loss concentrated in the GALP´s “upstream” sector, related to oil & gas exploration and production. The company admitted challenging market conditions as the leading cause for the drop as the company was forced to significantly cut back production due to the lack of demand caused by the Pandemic. To mitigate these losses, Galp is expected to cut back dividends in 50%, to €0.35/Share. Despite this, the new CEO of the company, Andy Brown, has declared the plan to pursue an investment of €200m to be allocated in renewable energies. General and Voluntary takeover of PSI-20 company Semapa. Company Sodim offers to buy the remaining shares in the conglomerate Semapa which has multiple subsidiaries in the Paper and Forestry industries. Sodim is bidding for the 28% stake in Semapa, or about 22.8m shares, that it does not already control. Sodim is offering €11.40 in cash for each Semapa share, 20% higher than the stock’s closing price of €9.50 on Feb. 18. The stock soared over 20% after the announcement, now over what Sodim is offering, currently sitting at €11.90. The company is likely to be delisted once the takeover comes through.

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The (un)ethical dilemma of short selling How short selling can contribute for the improvement of society and how are people taking advantage of it for personal gains. Introduction Ever since Steve Carell’s The Big Short¸ short selling became mainstream to new (and many clueless) investors who have joined the Robinhood app from the recommendations of their investing prophets friends who are 500% up on their Tesla position and taking advice from now infamous reddit group WallStreetBets on how to make insane returns in a short amount of time, several times not successful. Jokes aside, the act of betting against a company through shorting has risen to fame in the recent years and it is important to, at least, know the basics of what it means. For a more detailed explanation on this topic, I would recommend my colleague’s article in NUR’s November 2020 edition, but essentially the investor earns a profit by a decrease in price of the shorted stock in question. Additionally, while for a long position (the opposite of a short position, meaning that the investor buys the stock) the gains can be infinite as the stock price can grow indefinitely and the losses can only reach 100% (assuming no leverage), for a short position the inverse is true, the gains are limited and the losses are infinite, making it an even riskier operation. The purpose of this article is not to dive in the mechanical part of short selling which has already been covered, but rather to discuss about its place on our society and if it should be allowed or not and with what restrictions and regulation to support it as a transparent trade.

Background Activist short sellers (which are also one of the main argument against short selling, at least in part) have been increasingly important in the world of cracking down corporate fraud in public markets, which is a problem most capitalist societies face today due to complacent and corrupt auditors, regulators and government officials (such as the Securities and Exchange Commission (S.E.C.)) who are nudged by Adam Smith’s invisible hand of monetary incentives to turn a blind eye on what is

Bernardo Patrício

going on and, finally, due to overoptimistic equity research analysts. But what are exactly activist short sellers and why are they becoming more prominent in the financial markets? While some investors like to short stocks with a “lowkey” approach by being very secretive about their deals, activist short sellers are radically the opposite as they announce to the investing world their position and publish a report on the investment thesis of why the firm is overpriced. Many of these times, these reports include allegations of fraudulent actions taken by the management team, which can have many shapes and forms such as deceiving the shareholders (remember the Nikola fiasco in November of last year) and forging financial statement’s values (as with Enron’s accounting scandal) in hopes that the authorities take notice and start investigating these companies thoroughly on those allegations.

Risks of being a short seller Investors like Bill Ackman for Pershing Square Holdings and Carson Block from Muddy Watters Research are two of the few many activist short sellers that try to profit from the demise of a firm’s share price by publicly criticizing them. But being an activist short seller entails some risks. Firstly, there is the risk of an incoming lawsuit by the affected firm and the securities commission due to alleged market manipulation which can ramp up to millions in court costs. Secondly, firms also find ways to intimidate activist short sellers by hiring private security guards to follow or harm them, foreign companies to dox and hack their computer and address, and sending phone and mail threats to them and their families, as documented by Mr. Block during his time of investigating fraudulent Chinese firms listed in the United States.

A new approach to short selling Finally, the surge in activist short selling in recent years has also been due to a trend that has facilitated the activity and opened it up for people with the bbbbbb 4

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expertise but without the capital or the banking connects to do so. The “balance-sheet approach” is now the common way of initiating an activist short sell position where the individual sells its research on a particular firm to a hedge fund for a percentage fee of the profits of the trade since they have the means to do so (fairly large amounts of capital and are able to short stocks due to their connections with investment banks or wealth management institutions). It is also important to mention that the individual will be the “face” of the trade to the public, in other words, the name of the hedge fund will not be disclosed anywhere to protect their privacy and the privacy of their shareholders and only will the individual face the backlash and criticism imminent from the firm’s management team and most ferocious shareholders. Still some questions regarding transparency on these trades face some scrutiny from the S.E.C. and may be led to court if evidence of market manipulation arises.

The advent of social media has sharply increase the number of activist campaigns 763










higher is the volume and the tighter are the bid/ask spreads which is positive for investors. Shorts add selling pressure in the present which could drive the stock price down momentarily, but as the legendary long-term investor Warren Buffett phrases it: “The more shorts, the better, because they have to buy the stock later on”, in other words, short sellers are buyers in the future. In times of great panic, like the 2008 financial crisis, shorts can act as the counterbalance force in an environment where everyone is afraid to buy on the act of profit taking of their short positions, meaning that short sellers add buying pressure in times of steep declines to realize their gains (closing the positions and receiving the cash earnings) and thus reducing the volatility of the overall market.

#2 Short sellers can act as the market’s vigilantes of possible fraud Short sellers are adept to read thoroughly the firm’s annual and quarterly reports as are to attend or read the transcripts of earning calls to search for clues on possible financial shenanigans that may be happening. In the absence of action by the S.E.C., these individuals act effectively as the police of the market to find any evidence of wrongdoing by public enterprises since they have the economic incentive to do so, which is to say that if they are right, they can win big. Short sellers were the cause of some early 2000’s findings in shady accounting practices such as in MBIA’s municipal collateralized debt obligations (CDOs) by Bill Ackman and Allied Capital’s mismarking and deferring of their loan losses by David Einhorn, immortalized in the books Confidence Game by Christine Richard and Fooling some of the people all of the time by Einhorn himself, in a time where regulators investigated more the short sellers for alleged market manipulation than the practices of these firms.

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Reuters

The case for short selling #1 Higher market liquidity and lower stock price volatility Short selling allows both optimistic and pessimistic investors to trade in the market of each security, and with more investors in the market, the

#3 Equity analysts are overoptimistic, audit firms are complacent of accounting gimmicks, regulators and governments officials are influenced by lobbies, and, finally, credit rating firms still may have an incentive problem It is known that Wall Street stock analysts are gggg 5

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always bullish and if you do not believe that ten of the 17 Wall Street analysts covering Enron still rated the company not a buy, but a strong buy two months before it declared bankruptcy. If you thought we had learnt our lesson after Enron’s accounting scandal which caused the shutdown of one of the biggest accounting and auditing firms at the time, Arthur Andersen, just last year Ernst & Young (EY) was caught being complacent in the Wirecard incident and is now being charged alongside Wirecard executives for fraud. In The Big Short, Mark Baum (Steve Carell’s character) addresses the bad incentive issue of credit rating agencies when he confronts Standard & Poor’s for not changing the ratings on CDOs as banks bought investment grade ratings for their loan securities even though the underlying asset had rising default rates. Some research states that the bad incentives issues for credit rating agencies may be left to solve even after “The Great Recession” blowback on the financial system. This is to make the argument that, if nothing else in our financial system works to stop these scandals from happening, we have short sellers always looking for the next fraud to unmask and, the less ethical part, to take big payday off of it.

#4 Reduces agency costs and corrects inefficient capital allocation By having an economically incentivized player in the market that acts as the police of possible corporate deceit, it discourages the manipulation of earnings reports and forces the management team to be more accountable and transparent of their mistakes. The other economic argument for short selling is that it identifies non-productive firms (sometimes called “zombie” enterprises) that report forged incredible quarterly results from which capital should not be invested in, which may have significant opportunity costs by not investing on performing assets.

Cases Herbalife, a multi-level marketing scheme denounced by Bill Ackman was an example of a short position that brought into light a business model that shared some similarities with a pyramid

scheme, although the short was not successful due to the vengeful backing of Carl Icahn on Herbalife, leading to a short squeeze. Still, it addressed the issue of taking advantage of the less educated immigrant population of the U.S. in order to sell the firm’s overpriced products.

Source: Yahoo Finance

More recently, Nathan Anderson, another activist short seller, published a report denouncing Nikola, the start-up that was believed to be a future competitor in the electric trucks segment to Tesla. In its report, Anderson stated that Nikola was advertising technology it did not have and this was deceiving investors thinking that the company had the capabilities to be a leader in the industry. Nikola tried and ultimately failed to reassure the investors that the allegations made by Anderson were groundless, leading to a share price decrease of nearly 50%, the resignation of the founder and former CEO Trevor Milton and the cancellation of a $2bn deal with General Motors.

Source: Yahoo Finance

Despite there being benefits (not only for the private investor, but also for society) by not banning short selling, it carries some risks regarding its abuse through the manipulation of the market due to information asymmetry. The next points will discuss some of the downsides of short selling. 6

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The case against short selling #1 Short and Distort (S&D) tactics The major thesis against activist short selling is that it is essentially market manipulation which translates to influencing the behavior of the market for personal gains by individuals. S&D is the (illegal) act of creating fear in the markets concerning a particular stock for which the individual already had betted against before-hand, causing the stock price to quickly crash and the S&D practitioner to make a significant profit. There is a very fine line between activism short selling and S&D since in both cases fear is struck on the investors causing the share price to crash and both take a considerable gain from the operation. The small difference is whether the action that caused fear in the market is legitimate or not, in other words, are activist short seller accusations justified or not and it may be hard for the S.E.C. to prove that someone actually had bad intentions since most of their writing is protect by the 1st amendment right of free speech, making banning activist short selling (or increasing regulations on it) more favorable in order to stop these market manipulators from getting high gains without any consequences. It also does not help the case for activist short sellers that they publish the short reports hours before the options’ expirations. This means that put options volume will dramatically surge hours before its expiration and, when expired, the underwriters of those options will buy the shares from the holders of the options at the strike price and sell in the market, creating a large downwards pressure on the price, which is exactly what the short seller wants to take a profit.

#2 It can economically impair sound companies The economic costs of the publicly traded companies who are “raided” by a group of malicious investors aiming to undermine the general confidence in the firm may be considerable. S&D practitioners will invade every social media platform (Twitter, Seeking Alpha, Reddit) with bearish sentiment on the stock creating a crash in its price that will benefit those individuals a great amount. The spread of “fake news” from all over the media can break company due to the cancellation of partnerships, joint-ventures or M&A deals that

could be very significant for the company in the long-term. The access to funding can also be limited if equity or debtholders are unwillingly to provide cash to the company due to the scare that the allegations might be true. Finally, the brand damage that could be done to the firm may cause lost of trust by clients and suppliers.

Cases S&D cases are rarely brought on court since they are very difficult to prove, but there is one recent case that was brought to trial by the S.E.C. Gregory Lemelson and Massachusetts-based Lemelson Capital Management. They are on trial on the accusation of illegally profiting $1.3m by issuing false information about Ligand Pharmaceuticals after taking a short position. The S.E.C. alleges that in 2014 (the individual was only charged in 2018 after numerous complaints by the victim company) Lemelson lied about the company in radio shows, social media, and written interviews to shake the investor’s confidence and to drive down the stock price of the enterprise. Lemelson stated that the firm was near bankruptcy and that investor relations had told him that Ligand’s flagship drug, Promacta, was going obsolete. Furthermore, he cited an European doctor’s (which was an investor in the hedge fund leading the short trade, thus having a financial interest in Ligand’s stock decline) negative views on the drug. This case is still on trial. Another case relates to John Fichthorn, a known short seller who found himself on the other side of the coin. Fichthorn was in the board of Health Insurance Innovations which suffered an attack by a S&D group from a report that came out on the Friday of options expiration. “At 11:00 a.m., the stock would start going down, and at 12:00 the company would learn of the article,” he says. “We had an hour to respond.”. He additionally stated that “the reality is if enough of them pile on and write enough bad stuff, they can destroy companies. I watched it from the inside.” pointing specifically to a short-seller rumour that the FBI was at the company’s headquarters when it was not. Later the company was renamed Benefytt Technologies and sold to a private equity firm at a discount related to the price before the attack. The damages were permanent. 7

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Final remarks Joshua Mitts, a Columbia Law School securities expert, has analyzed the 1720 short idea posts on Seeking Alpha, an investment forum website, from 2010 to 2017 and discovered in 86% of the times when a short report is published it is preceded by an “extraordinary” amount of options trading. According to him, short sellers are using fastexpiring put options bought before the release of a report to spur more selling by the underwriters of those options, driving the stock prices downwards due to higher than usual selling volume. The S.E.C. is attentive to this situation and Robert Jackson, the S.E.C. Commissioner, challenged his own organization to “identify folks who are dancing a very fine line between trading and market manipulation.” Like stated before, anonymity and free speech laws can limit the steps to enforce legal action to these manipulators, making it even more attractive to evildoers.

Where does the equilibrium lie? § § §


More liquidity and lower market volatility Market’s vigilantes Bad incentives from supervising institutions Increases productivity indirectly

§ §




Market manipulation Destruction of healthy enterprises Difficulty in prosecution due to freedom of speech rights

There is definitely a good and bad side to short selling and this article tried to explore both sides of the argument to give an expanded view to the readers. It is needed more regulation to protect the interests of the whole society since either a full ban on short selling or a fully liberalized market will lead to nefarious outcomes where the financial elites may take advantage of the little person one way or another. Some have stated that fully disclosing short positions higher than 3% of the firm’s market cap and the subsequent decreases and increases of the position, like shareholders of publicly traded companies are obliged to do, could be a solution, as it is a minimum holding period after the short report is published so that the short seller does not “dump” his position immediately after it is published, still no concrete regulation is now in place. 8 NIC Undergrad Review

Extra: Basics of Company Valuation Business valuation is used to determine a company’s fair value, its current worth, whilst using objective measures. To do so, two approaches can be conducted. On one hand, the intrinsic approach determines a firm’s net worth by predicting the cash flows this same firm is expected to generate over time. Thus, it is clear that companies with more volatile and less predictable cash flows will have a higher probability of not being precise. On the other hand, the relative approach evaluates a company’s net worth by performing a comparative analysis with similar businesses in the market. Evaluating the current worth of a given company is normally conducted in cases of corporations’ restructure, liquidation, mergers and acquisitions, determining shares’ value for listing on the stock exchange, sale and purchase of intangible assets, voluntary assessment, divorces or inheritances in case of family-owned businesses. Wrapping up, there are three main valuation approaches when estimating the value of a given business: Market, Income and Asset approaches.

Market Approach This first approach is based on three distinct methods and is mainly used to determine the appraisal value of a company, an intangible asset, business ownership interest or security. Concerning market value, the simplest valuation process, the valuation of a certain enterprise is obtained by simply multiplying the number of the company’s gggg

Carolina Freitas outstanding shares by its share price. Another method, despite being an imprecise measure, relies on comparing the firm’s market multiples with the average value indicators of some akin businesses. Nevertheless, in order to do so, the determinants of a comparable company must be broken into distinct components (tangible and intangible assets, real and personal property, taxable and non-taxable assets) in order to be more reliable and accurate. These valuation multiples con be split into enterprise value multiples and equity value multiples. The first type is less affected by changes in capital structure, acknowledging a direct comparison among different firms, including enterprise value (EV) to sales, EV/sales, EV/EBIT and EV/EBITDA ratios. The latter type is typically used by the majority as it is normally readily available on most financial websites and is easier to be calculated. This comprises price to earnings (P/E), price-earnings to growth (PEG), price to book (P/B) and price to sales (P/sales) ratios. Moreover, this second approach can sometimes be imprecise once companies used for comparison may be over or under valuated in the market. Thirdly, comparison between firms concerning real estate appraisal, by analyzing recent sales and asking prices, can also be another reasonable valuation approach. The market approach is mostly used in merger and acquisitions transactions, commonly for finance purposes, when a business synergy is expected by the purchasing company. Nevertheless, this method has some limitations when involving the valuation of large enterprises since they possess various intangibles such as intellectual property, goodwill, reputation and customer relations. Thus, despite analyzing comparable multiples, sales and transactions, it can often not reflect the company’s actual value.

Income Approach The income approach requires extensive analysis, using a variety of scenarios, and thus, most probably, conducting a more accurate and fairer enterprise value. Discounted Cash Flow (DCF) is one of the most classic methods used in a hhhhhhhh 9

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business' valuation, which relies on projections of future cash flows, adjusted to the current market value of the company. In other words, predicting the present value of a corporation's future cash flows generated over its remaining lifecycle, taking into account inflation. When calculating the generated cash flows, both unlevered and levered DCF can be performed. The levered DCF focuses on forecasting and discounting the remaining cash flows available to shareholders, in order words, after all cash flows regarding non-equity claims are removed. The unlevered DCF, which ends up being the most commonly used method, only takes into account operating cash flows when forecasting. Then, only after deducting its present value, nonoperating assets (cash) are added, and liabilities (debt) are subtracted. Unlevered DCF encompasses six main steps: forecasting annual unlevered free cash flows; obtaining terminal value; discounting at the weighted average cost of capital (WACC), the appropriate discount rate, the cash flows to the current present value; adding the value of non-operating assets; subtracting debt and dividing equity value by shares outstanding. Nevertheless, despite conducting a more reasonable valuation, small changes in the cost of capital can make a huge impact on the calculated value, making it extremely sensitive to assumptions made when forecasting. Additionally, taking into account the fact that projections are concerned with what the future holds, they have some probability of not being accurate. Nonetheless, corporations that show more steady and predictable cash flows tend to be more precise and truthful.

value method entails computing the required costs to replicate or create a similar company in the same industry from the ground. Once these costs are estimated, depreciation will be taken into account. This last method provides a clear view of the current market costs and conditions as well as a truthful value for all tangible assets. Nonetheless, it is common that the company’s book value obtained is smaller due to “ghost assets”, assets that are currently not being used. Conversely, one of the most relevant drawbacks of this valuation approach is the amount of data required such as equipment, labor, cost of materials and often more. Nevertheless, when combined with the income approach, which indirectly values intangible assets, provides a relatively objective and defensible value for many valuation purposes. Summing up, the fair value of a company, summarized by the following sequence, can be obtained through several methods, each of which might lead to different values in terms of a business’ worth. Furthermore, economic events as well as corporate earnings can also dispute an impactful role when analysts conduct enterprises’ valuation, a quantitative process frequently discussed in corporate finance.

Asset Approach The Asset approach allows getting a solid capital valuation by determining the current value of the company’s assets, namely materials, equipment, buildings, goodwill and many others. Book value is one of the three main methods and consists of calculating a business’ net worth by adding up the current value of its assets and subtracting the current value of its liabilities. By doing so, the value of the shareholders’ equity of a company, exhibited on its balance sheet, is obtained. Liquidation value is another option when determining an enterprise’s value which lies in calculating the net cash received if all company’s assets were liquidated and all its liabilities were paid off. Lastly, the replacement 10 NIC Undergrad Review

Business Deep Dive: Hilton Worldwide Holdings Inc.

Raquel Guilherme Tavares Santos Hilton Worldwide Holdings is a global brand of full-service, high quality hotels and resorts. The firm has targeted both business and leisure travellers by locating its high-end services and products near city centres, airports and popular vacation destinations. As of December 2019, there were 584 Hilton Hotels & Resorts, distributed through 96 countries across six continents.

Markets Hilton Worldwide Holding is listed in the New York Stock Exchange, under the ticker (HLT). As of December 2020, HLT’s shares were mainly held by Institutional Investors, including Price Associates, Vanguard Group, Blackrock, amongst others. Since its IPO in 2013, the stock has risen 154% due to its great competitive advantage in the industry of hospitality, mainly based on its strong portfolio of properties, along with its respective geographic dispersion. However, Hilton Worldwide Holdings has been one of the most affected businesses by the pandemic, mainly due to its area of operations which was extremely conditioned. The firm’s IPO left the stock price roughly unchanged, with it entering a choppy sideways pattern that finally broke out in 2014. However, the ascending trend that was verified from October 2017 onwards was yet to come. The stock reached

an all times low in 2015, breaking through the IPO’s price. Nonetheless, a sequence of beating estimates earnings, alongside with increasing properties’ portfolio led to gains of 41% from October 2017 to January 2020. In the March selloff, the HLT’s stock plummeted to $68.24, from an all-time high of $110.74. Nevertheless, it has registered a comeback, currently trading at $123.68, a new record value, with investors seeing in it a big post pandemic potential.

Price Performance

Source: Bloomberg; Note: HLT US Equity – Hilton Worldwide Holdings Inc.; DJUSLG Index – Dow Jones US Hotels Index

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History and Development The hotel chain was first founded by Conrad Hilton, in 1919, when he bought his first property. However, the first hotel to bear the Hilton name was the Dallas Hilton, located in Dallas, Texas, which started operating in 1925. At the time, most luxurious commodities that we nowadays usufruct of had not been yet invented and, in that sense, Conrad was an innovator, always looking for ways to improve his guests’ luxurious stays at his hotel. With the success of the first establishment, two years later a second hotel opened in Waco, being the first one with cold running water and airconditioning, high-end services at the time. Conrad’s main goal was to operate the best hotel in Texas, as a consequence of his absolute commitment, leadership and innovation, Hilton is nowadays one of the most respected brands in the world. The company verified a steady growth throughout the following years, reaching an important landmark in 1943 with the acquisition of the Roosevelt and Plaza hotels in New York City. Following this acquisition, it became the first coastto-coast hotel group in the United States. Additionally, the Roosevelt Hilton was the first hotel in the world to install televisions in its guest rooms. In 1946, “The Hilton Hotels Corporation” was formed, and filed to list on the New York Stock Exchange. Three years later, Hilton International is born, with the opening of the Caribe Hilton in Puerto Rico, this establishment is famously known for being the place where the drink Pina Colada was invented. Meanwhile, Conrad’s name was well known worldwide, with great recognition and respect being associated to it. In 1949, the hotelier appears on the cover of Time Magazine, being the first businessman of this industry to achieve such recognition. The Corporation continued to expand its line of business and its properties portfolio, and, in 1954, it carried the biggest real estate deal ever, by acquiring Statler Hotel for $111M. At the same time, with increasing demand for its services and goods, Hilton Corporation looked for ways to improve its client service and respective relation. Thus, HILCRON was created, the first central reservation office. In 1959, Hilton introduced the Hilton Carte Blanche card, the premier travel and entertainment card owned by Hilton Hotels. In addition, in the same year, the corporation pioneered the airport-

hotel concept by opening the San Francisco Airport Hilton. A decade later, structural changes occurred in the organisation. Hilton International formed as a separate company, with Conrad Hilton as its president. Meanwhile, his son succeeds him as president of the domestic Hilton Hotels Corporation. In 1967, Trans World Airlines acquired Hilton International, Conrad Hilton resigns his presidency to become chairman. Additionally, with the size the organisation had grew into, Hilton started conducting his business through subsidiaries, and therefore, “Double Tree by Hilton” was born. From 1919 to 1970, Hilton had established its position in the hotels’ industry along with its competitive advantage, consequently maximising its potential. Therefore, the corporation started to expand to complementary areas of business, and in 1970 Hilton purchased the Flamingo Hotel and the Las Vegas Hilton. It became the first NYSE-listed company to enter Casino’s business. At the age of 91, Conrad Hilton passed away. In his memory, Conrad Hotels was founded with the goal of operating a network of luxury hotels and resorts. In 1987, Hilton introduced Hilton Honors, its guest loyalty program. It quickly surpassed competing hotel loyalty programs by offering members both points and air miles. Additionally, the first Hilton website was launched. The firm also decided to exit the NYSE due to structural issues. More recently, Hilton Honors has joint forced with Amazon as the first-ever guest loyalty program to participate in Amazon Shop with Points. Shop with Points gives Members the ability to pay for purchases of just about anything at using their Hilton Honors Points. In the beginning of the following millennial, Hilton Hotels Corporation reacquired Hilton International, reuniting the companies for the first time in 40 years and expanding Hilton’s portfolio of brands worldwide. A year later, in 2007, the corporation completed a merger with an affiliate of The Blackstone Group’s real estate and corporate private equity funds, in a transaction worth $26bn. In 2009, Hilton Hotels achieved an impressive landmark by having a presence in 76 countries, making it the largest full-service hotel brand in the world. In the same year, it changed its name form Hilton Hotels Corporation to Hilton Worldwide.

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Hilton returned to the New York Stock Exchange in 2013, to trade under the ticker symbol HTL. The relisting came after some ups and downs while at Blackstone’s control as at the height of the financial crash, Blackstone wrote down its investment in the hotel group by roughly 70%, leading to more capital injections and a debt restructuring before going back to the NYSE. In 2018, Blackstone sold its remaining stake in Hilton Worldwide, 11 years after its acquisition, being one of the most profitable private equity transactions ever, tripling its investment in Hilton. During a few years prior to 2018, Blackstone had been gradually selling its stake in the firm. In 2017, it had sold a 25% stake of Hilton to Chinese firm HNA, stake which has been exited since then. In June last year, Hilton announced the signing of an exclusive management license agreement with Country Garden to develop the Home2 Suites, part of the midscale segment, by Hilton in China. The agreement with Funyard Hotel Investment Limited, a subsidiary of Country Garden, contributes to the further expansion of the strategic cooperation between Hilton and Country Garden. China is currently Hilton’s second largest market, and it has consistently seen rapid growth – with the rise of the Chinese middle class - and is forecast to become the world’s largest lodging market. Conrad’s main goal was to operate the best hotel in Texas, because of his absolute commitment, leadership and innovation, Hilton is nowadays one of the most respected brands in the world. HTL’s properties vary in scale, capacity and targeted consumer. The organisation is best known for its luxurious and high-end services and goods, and that reputation is well deserved with 63% of its rooms belonging to upscale hospitality. Within these 63%, 30% are upper upscale rooms, and 33% upscale. Moreover, Hilton supports a diversified business and has also invested in luxury hotel properties, which account for 3% of its rooms. Nevertheless, Hilton is also established in the lower levels of this market, with 1% of its rooms being midscale. The fact that the firm’s operation is mainly focused on luxurious services, hence upper-class consumer, makes its occupation rate vary with the economic context, since superfluous goods and service loose utility when there is a recession, and gain when there is growth. Hilton Worldwide Holdings is an international

organisation, with its properties’ portfolio dispersed through 96 countries. Nevertheless, the US market is its main operations focus, with the country being responsible for 84% of the organisation’s EBITDA. Asia Pacific is its second largest market, 9% of its EBITDA comes from here, 4% from American Non-US, 2% from Middle East & Africa and 1% from Europe. From the EBITDA’s geographic distribution, even though the company went through a big internationalisation process, HLT is still very domestic based, making the organisation’s performance especially dependent and positively correlated with the American economy. Overall, Hilton Worldwide Holdings is the owner of the leading brands serving virtually any lodging need anywhere, has one of the highest rates of consumer satisfaction and a premium grow market share.

13 NIC Undergrad Review

Performance Analysis HTL’s income statement registered a positive evolution from 2017 until 2019, with revenues growing an average 8% year on year, EBITDA 14%, EBIT 21% and Net Income 19%. Being the firm’s operations geographically dispersed and positively correlated with economic trends, it took a big advantage from the economic growth verified during these years, with increasing demand for its services. Consequently, net profit margin rose by on average 10% year on year. However, with the hit of the Covid-19 pandemic, these trends were reversed. In fact, Hilton was highly impacted by it, and that is reflected in its income statement 2020 values. Revenues halved, EBITDA declined by 154%, accompanied by a decline of 125% in EBITDA, furthermore, net income fell by 115%. The firm is among those who most suffered with global restrictions and lockdowns. Passengers could not reach their destination, demand fell due to uncertainty, costs increased with health and hygiene added costs and average consumer purchasing power declined. Overall, this led to the decline of the company’s net profit margin by approximately 133%. From the balance sheet analysis, it can be concluded that Hilton Worldwide Holdings prefers debt to equity, with an average ratio of total debt to equity of 850. This preference has been aggravated in recent years, especially with the impact of the Covid-19 pandemic. Liabilities have registered an average 11% year on year growth, while equities had a positive value in 2017 but a negative value in 2019. Meanwhile, Hilton's assets remained mostly unchanged, with an average increase of 3% year on year. Nonetheless, as we have seen in the income statement, the pandemic has impacted Hilton’s operations. In 2020 alone, the organisation increased its liabilities by 18%, and decreased its equity by 215%. This high increase in liabilities is related to the firm’s usage of debt for investing and financing purposes. Hilton’s cash flows maintained the same trend from 2017 until 2019, with a gradual increase of operating cash flows of 28% year on year, and a gradual decline of 20% and 9% year on year, of financing and investing cash flows, respectively. Thus, revealing an expanding firm, with its operations growing, its financing need declining and a consonant investment in its operations, overall, a jjj

mature organisation. However, in 2020 the firm faced a complete reverse of its situation, with the hospitality industry being one of the hardest impacted sectors of the economy. Its operating cash flows declined 95%, while its financing cash flows increased by 283% and the investing cash flows stayed more or less the same. Within a year, we saw a mature business become an endangered one, with high levels of indebtedness and low activity.

Source: Bloomberg

Source: Bloomberg

Source: Bloomberg

NIC Undergrad Review


Industry Overview Hilton Worldwide Holding is inserted in the Hospitality Industry, it includes hotels, motels, lodging, food services, tourism and recreation services. Effectively, in recent years, this industry has enjoyed a steep growth, mainly due to globalisation and an increase of the general population’s income. Even so, this industry was the hardest-hit by the global Covid-19 pandemic. Since March last year, planes have cyclically been grounded, hotels have closed or have been conditioned, among many other consequences. According to the most recent analyst’s estimates, the industry will only reach rates and revenues above 2019’s by 2024. These analysts’ forecasts are based on the loss of businesses and on the decline of the average consumer income. Many businesses closed their doors due to the lockdowns and imposed conditions, not only of the hospitality industry but also of complementary ones such as transportation. The economic crisis reduced the average consumer’s income and induced uncertainty about the future, creating the right mixture for consumers to use up only essential goods and services and save more, leaving the leisure associated with the hospitality industry behind.

The Covid-19 pandemic has established new emerging trends for the industry, which may disrupt it, since a high capacity of adaptation will be necessary. Some example of emerging trends are artificial intelligence, smart hotels, sustainability, closer destinations, amongst others. All have the potential to change the way market players conduct their operations and test their competitive advantage and position in the market. Economy hotels and accommodations will likely recover faster than other areas of business, due to their higher and steadier demand, less maintenance and fewer labour costs, enabling most of these outlets to still turn in a positive profit. Luxury hotels and resorts, such as the properties held by Hilton Worldwide Holdings, on the other hand, need greater occupancy rates. For these hotels, the situation has three variables, including variable income (depends on occupancy) and semi-fixed (extra services) and fixed costs, making semi-fixed expenses the only way to readapt to the new social and economic context, being nevertheless a risky move as this may significantly change customer experiences (a crucial component on client’s decision making). Effectively, the future of hospitality is mainly dependent on the pandemic itself since, as long as Covid-19 is around, this industry’s activities will be conditioned, not being able to formally recover.

Price Performance of Hilton and its Peers

Source: Bloomberg; Note: HLT US Equity - Hilton Worldwide Holdings Inc.; CZR US Equity - Caesars Entertainment Inc.; MAR US Equity - Marriott International Inc. / MD; H US Equity - Hyatt Hotels Corp.; VAC US Equity - Marriott Vacations Worldwide Corp.; CHH US Equity - Choice Hotels International Corp.; WH US Equity - Wyndham Hotels & Resorts Inc.

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From the many companies in the industry, the ones to be considered as peers of Hilton are in the table above. Even though companies from Europe or Asia could have been included as Hilton’s competitors, only companies with their headquarters in the US were analysed. This was due to the fact that regulations and certain restrictions are placed depending on the region and respective Governments, therefore, the analysis could be masking certain factors considered to be important in the respective business models. Even though these firms are under similar standards, most of their market capitalisations differ from Hilton’s. Mariott International has around an extra 14m of market capitalisation when compared to Hilton but a much lower price. Conversely, the other companies such as Caesars and Wyndham have much lower market capitalisations, even though, with a similar business model and expansion aspirations to Hilton’s.

Valuation Overview As of the 26th of February, HLT was trading at $123,68 - a record value for the stock. Hilton’s P/FCF ratio, which measures the price of the security relative to the firm’s free cash flows, is of approximately 51,72, placing the firm near the 25th percentile. Furthermore, HLT currently holds one of the lowest EV/EBITDA ratios in the industry. Therefore, it appears the company may be undervalued relatively to its peers. The enterprise value to sales ratio and price to sales ratio are exceptionally low when compared to the other considered ratios, and Hilton Worldwide Holdings is no exception, placing on par with its peers. Against this trend, the firm’s 52 week high is placed near the median of the peer’s, which is odd. Hilton Worldwide Holdings has the second largest market capitalisation in the industry, making it one of the biggest players and, with such low ratios, it would be expected for the stock to be in high demand. However, when compared with the top 52-week highs, the 75th percentile is placed on$160, and HLT’s current price is not even close to that range, even though it has reached its all-time high in the last week of February. This may be a sign that, although the stock’s price has reached a record value, it is currently not a top pick by investors. From the analysis, it is implicit that more bets are being placed in other firms than in HLT for the postpandemic recovery. Overall, HLT seems to be undervalued relatively to the industry, with some space for valuation gains, since its ratios fall within the lower limit of the trend verified in the industry. Nevertheless, the organisation is not being seen by investors as a clear winner in the post-pandemic world, which may be a decaying sign. The key missing piece, when looking at HLT’s stock, is whether the late picks in this industry are being driven by intrinsic value or just investors’ hopes of future growth.

Outlook Hilton Worldwide Holdings is one of the oldest organisations in the corporate world, ant the most successful one in the lodging/hospitality industry. The success of its operations came mainly due to globalisation, as traveling became one of the main habits of the average consumer, and as the hhhhhhhh

transmission of information across long distances became easier, therefore, facilitating the management of such a disperse operation; additionally, the increase of the average consumer purchasing power increased the demand for Hilton’s services. However, the corporation now hope

NIC Undergrad Review


faces three main challenges, which will define its future success: technology, consumer habits and the pandemic. Technology came to challenge Hilton’s organisation and structure. Until now, the firm had managed to maximise technology’s potential in its own favour, by converting it into even more luxurious services and goods for its costumer. However, the technological trend that is now verified in the hospitality industry is one more directed to automation and efficacy, with costs and bureaucracies being reduced through the innovation and substitution of old, out-dated, processes, thus providing competitive advantage to the holders. Effectively, the company’s capacity of adaptation and flexibility will be highly tested as it restructures itself to incorporate such innovations and as it possibly faces high switching costs. Consumer habits are at constant changes, both geographically and across time. Once again, Hilton Worldwide Holdings’ flexibility and capacity of adaptation will be tested, as it will have to constantly adapt its services and goods to the new set of consumers’ habits. Of course, it has had to deal with such obstacle ever since its creation, as it is a key component of the industry, nevertheless, as societies evolve, consumers’ preferences appear to change increasingly more rapid, hence deepening the problem faced by lodging. As for the last challenge, the pandemic came to further complicate the situation. This can be stated, as within a year, an individual’s preferences and habits changed considerably. Nowadays, health, sustainability, social justice, technology and social media, amongst others, are always present in consumers’ decision making. Therefore, HLT’s must always be one step ahead of the consumer and anticipate its necessities and provide the respective service. Is it capable of such? As mentioned in the ‘Industry Overview’ section, hospitality is facing serious difficulties related with the pandemic. Most businesses’ operations are working highly conditioned, or, in some cases, are not even able to operate. Consequently, some firms have perished, and many others may follow the same fate in a nearby future. Also, some see their once stable and well-established operations become fragile. Hilton is no exception, and its future performance is negatively correlated with the pandemic’s development, since its operations will not be able to totally normalise until Covid-19 has been defeated. Furthermore, HLT’s position in the

luxurious segment decreases its ability of adaptation and its position in a leisure industry will be, as it currently is, seriously affected by the uncertain economic context. Through the financial analysis, we were able to see the effects of Covid-19 materialising in the firm’s financial performance. Nonetheless, we cannot forget that until 2020, Hilton Worldwide Holdings was a thriving organisation, with solid financial statements and an acceptable financial health. Its current situation is a consequence of the pandemic’s impact, and, although its effects will still be felt long after it has ended, many investors believe the firm will have a quick recovery. This “V” shaped comeback is in fact being verified in the stock’s price performance. Since it hit its lowest value of $68,24, the stock’s price has been having a positive trend, and on the 26th of February it reached a fresh new record price of $123,68. The investor’s expectations are mainly being fuelled by the observed behaviour of consumers when they unloose the pandemic related restrictions, as seen in the UK, where when announced the end of the lockdown, there was a spike in travel appointments and hotel reservations. However, this optimistic forecast is being thwarted by analysts who predict that only by 2024 will the hospitality industry see its rates and revenues reach 2019’s levels. In summary, Hilton was hit hard by the pandemic, which affected its line of business, making the once secure and thriving organisation be at risk of default and of restructuring. Nevertheless, the market sees in it a huge post-pandemic potential, while analysts see ahead of it a 5-year recovery path, two contrasting views. The reality is that the stock just broke through its pre-pandemic level, while its operation’s performance is only expected to reach it by 2024. Hence, one can only seat back and ask himself if the “V” shape recovery is nothing but an unsustained rally, solely based on market sentimentalism.

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NIC-UD Fund: Monthly Performance Growing fears of inflation lead to the largest market sell-off since March of 2020, as bond yield rose to year highs and as tech stocks took the biggest hit.

Tomás Forte Vaz

Global Markets At the start of February, equities picked up where they left off as the S&P 500 and MSCI World Index both reached all-time highs, as optimism regarding a global recovery grew with the help of large-scale vaccinations programs beginning to take effect. However, we end the month in a negative fashion, as inflationary fears and subsequent potential Federal Reserve intervention drove the 10-year U.S. Treasury yield to a 1-year high, at 1.6%. The reassurance of the Federal Reserve Chair, Jerome Powell, that no such intervention would take place in the near future failed to calm investors, as we saw the largest sell-off since March, targeted at riskier asset classes, such as growth tech stock, as

the Nasdaq Composite fell 3.5%. Cryptocurrencies have continued to gain momentum despite their recent fall, reaching a record $1.7tn market cap valuation as it continues to split investors on its intrinsic value. In the world of commodities, copper soared reaching an almost 10-year high and crude oil rose 17% as the rise in demand hints at a potential supercycle, whereas a prolonged period of high prices is sustained as a result of excess demand. On the other hand, gold has fallen 7% even taking into account investors fear of rising inflation. February seems to have been a month of two half's, giving us little insight into what waits for the months to come.

Current Positions Our asset allocation did not suffer any changes as we continue to search for investment opportunities in line with our value investing principle. In what ended as an overall negative month, Walt Disney (DIS) was our top performer with a 12.41% growth, driven by a higher-than-expected rise in subscribers to its streaming platform Disney+. On the other hand, Kirkland Lake Gold (KL) has fallen despite having brought in as a hedge to the market, as gold further depreciated. Our excessive cash position is also an area which we aim to address in order to diversify our portfolio and capitalize on investment opportunities. Nº

Positions Weight on Total Equity


Entertainment US 17,73%

Pharma US Internet US




Streaming/Entertainment US Equity

Current Price

Open Price










US Equity




Social Media/Internet

US Equity





US Equity





US Equity




EV Battery





Consumer Products

EU Equity




Gold Miner

CND Equity



Utilities US 8,64%

Gaming ETF Renewables US



Electric Batteries ETF Gold Miner


6,34% 12,32%

Consumer Products EU 2,46%



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NIC-UD Share Price (Inception Cumulative Returns) 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 1/31/2021




Benchmark Analysis



Monthly Performance

Despite a promising start to the month, our fund suffered a fall in the share price of -3.51%, underperforming not only in comparison to the MSCI World Index who fell by -1.58% but also to the S&P 500 that registered a smaller downfall of -0.15% as investors bearish views lead an overall negative month for global equities. Eurostoxx 50 was the only one of our benchmarks to register positive returns of 0.17%, as the European Central Banks comments last week of having “flexibility to that is needed in order to react” regarding the sell-off of government bonds, lead to a small rally although short lasted. Our lack of exposure to European markets prevented the fund from taking advantage of this rise and could potentially have mitigated our underperformance. Given the FANG+ exposure to tech stocks, it recorded a loss of -5.37%, as Google and Facebook fell in light of rising Treasury yields. It was the only benchmark our fund outperformed, as Nikkei 225 and Shanghai Composite fell respectively -2.05% and -2.49%, concluding an unfavourable month.

15% 10% 5% 0% -5% -10% -15% -20% ETF #1 Stock Stock Stock Stock Stock ETF #2 Stock Stock #1 #2 #3 #4 #5 #6 #7

Portfolio PortfolioReturns Returnsvs vsBenchmarks Benchmarks 1% 4%




0% 3% -0,15%

2% -1% 1% -2% 0% -3% -1% -4% -2% -5% -3% -6%




Portfolio Portfolio (Share (Share Pri ce) Pri ce)

0,80% -2,05%

0,29% -2,49%

-0,43% -1,11%

MSCI MSCI World World Index Index


-2,52% S&P 500 FTSE 100 Eurostoxx Nikkei 225 Shanghai -5,37% FANG+ S&P 500 FTSE 100 Eurostoxx 50 Nikkei 225 Shanghai Composi te FANG+ 50 Composi te

Corporate News Facebook saw its self at the root of yet another controversy as the Australian government altered legislation in an attempt to restrict Facebook's market power in providing news, to which Facebook promptly responded by blocking news content from its platform. Since then, Facebook lifted the restriction as both parties aim to come to an agreement on more sensible terms but once again Facebook received back lash from authorities regarding its excessive market power. Coinbase has filed to go public, the first cryptocurrency exchange to do so, outlining the growing momentum in this sector, as its valuation rose to over $100bn for the first time. The Walt Disney Company further rose 11.7% after it announced that its streaming service Disney+ registered a total of 96m subscribers, surpassing analyst estimations, propelling optimism of its ability to overcome the closing of its amusement parks which drove adjusted earnings per share to $0.32.

19 NIC Undergrad Review

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