LA QUINTA HOLDINGS INC LQ
December 03, 2015 - 1:52pm EST by
ci230
2015 2016
Price: 14.92 EPS 0.495 0.685
Shares Out. (in M): 130 P/E 30.12 21.77
Market Cap (in $M): 1,935 P/FCF 7.75 7.29
Net Debt (in $M): 1,621 EBIT 190 217
TEV ($): 3,559 TEV/EBIT 18.8 16.4

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  • Hotels
  • Blackstone
  • Commodity exposure
  • Oil Price Exposure

Description

La Quinta Holdings (LQ) is likely to increase substantially in value in the near term, with a meaningful likelihood of a sale to a strategic buyer.  I must immediately tip my hat to Sugar's January 14 VIC post on shorting the stock; s/he was very correct, and timely, and I was able to make money on the short side partly due to her/his work-- thank you.  However, I think the pendulum has swung too far in that direction, and believe the opportunity with the stock is on the long side now.

Timeline

Please read Sugar's post for more background on the company.  This post will focus on why the present long opportunity exists, and possible event paths.

  • April 9, 2014 - LQ IPOs at $17.  BX owns 65% of the company.
  • May 20, 2014 - LQ reports good Q1 earnings.  Stock is $17.19
  • August 12, 2014 - LQ reports good Q2 earnings.  Stock is $19.71
  • October 22, 2014 - LQ reports good Q3 earnings.  Stock is $19.90
  • October 30, 2014 - BX launches a secondary offering; sells 32 mm shares @ $20
  • January 14, 2015 - sugar publishes VIC post.  Stock is $21.32
    • At this point, people really start questioning the company on their Texas/oil exposure.  The company continues to claim these fears are irrational and that it is seeing no effects.
  • February 24, 2015 - LQ reports good Q4 earnings.  Stock is $22.60
  • March 12, 2015 - BX launches a secondary offering; sells 23.9 mm shares @ $23.71
  • April 29, 2015 - LQ reports good Q1 earnings, and actually increases guidance, including FY RevPAR guidance to 6.0-7.0% growth.
  • May 28, 2015 - LQ peaks at $24.89
  • July 29, 2015 - LQ reports bad Q2 earnings.  LQ reduces RevPAR guidance to 4.5-5.5% growth, citing "several unusual items", and instituted a $200 mm share repurchase program, despite being levered 4.5x and previously committing cash flow to debt paydown.
    • The stock closes only down 78c to $21.35 as the street (aka the underwriting banks) defend the results.
    • This was the perfect shorting opportunity.
  • September 17, 2015 - LQ's CEO, Wayne Goldberg, abruptly resigns.  He was with the company since 2000 and CEO since 2006, and widely respected.  
    • His resignation is a surprise to everyone.  Keith Cline, the CFO, is named interim President and CEO.  Keith was previously CFO of Charming Charlie, a "women’s contemporary jewelry and accessories retailer", and before that SVP of Finance at Express.  Keith has no business operating as LQ's CEO, and it's shocking the company could not find anyone more qualified.
    • LQ reduces RevPAR guidance to 3.5-4.5% growth.  Recall it had just increased guidance in April.  I guess the company had to do that while BX was selling.
    • The company decides to use $100 mm immediately to defend the stock.
    • Investors capitulate, the stock falls (15.4%), shorts celebrate.
  • October 28, 2015 - LQ reports another weak Q3; the stock falls (9.0%).

That leaves us where we are today.  LQ is trading at $14.92, short interest is up to over 5% of the company, and everyone understands the situation with Texas/oil is bad.

I think Blackstone will try to put the company in play.

Blackstone still owns 27.1% of the company.  (And Eminence just filed a 13G with 7.4%)  It's clear from their prior sales that BX is looking to exit the company, and they've been very quiet since their last secondary in March.  The long-time CEO has resigned, leaving a novice to run the company for the past two months.  LQ is a rare publicly traded single brand hotel operator.  The brand has not been diminished or negatively impacted in any way; it was previously over-earning on high rates in shale regions, and that will reset down, but it has the same growth prospect as before.  The company should still easily do $200-250 MM in FCF next year, which is a 10-13% FCF yield.  Yes, it's highly levered, but debt isn't due until 2021, and it still owns 40% of hotels, which could be sold or refranchised for debt paydown.

The purchase of LQ by any of the multi-brand hotel operators would be immediately accretive and would give BX a clean exit opportunity.  (The fund does still own 45%+ of HLT.)  

Additionally, even without a sale, I believe LQ is very punitively valued on earnings growth that is suffering a temporary setback and should be restored.  20x 2017's 85c ==> $17 should be a base case, and 25x ==> $21.25 (+43% upside) is my bull case.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

LQ is sold to a multi-brand hotel operator.  Or results stabilize with stable oil prices.

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    Description

    La Quinta Holdings (LQ) is likely to increase substantially in value in the near term, with a meaningful likelihood of a sale to a strategic buyer.  I must immediately tip my hat to Sugar's January 14 VIC post on shorting the stock; s/he was very correct, and timely, and I was able to make money on the short side partly due to her/his work-- thank you.  However, I think the pendulum has swung too far in that direction, and believe the opportunity with the stock is on the long side now.

    Timeline

    Please read Sugar's post for more background on the company.  This post will focus on why the present long opportunity exists, and possible event paths.

    That leaves us where we are today.  LQ is trading at $14.92, short interest is up to over 5% of the company, and everyone understands the situation with Texas/oil is bad.

    I think Blackstone will try to put the company in play.

    Blackstone still owns 27.1% of the company.  (And Eminence just filed a 13G with 7.4%)  It's clear from their prior sales that BX is looking to exit the company, and they've been very quiet since their last secondary in March.  The long-time CEO has resigned, leaving a novice to run the company for the past two months.  LQ is a rare publicly traded single brand hotel operator.  The brand has not been diminished or negatively impacted in any way; it was previously over-earning on high rates in shale regions, and that will reset down, but it has the same growth prospect as before.  The company should still easily do $200-250 MM in FCF next year, which is a 10-13% FCF yield.  Yes, it's highly levered, but debt isn't due until 2021, and it still owns 40% of hotels, which could be sold or refranchised for debt paydown.

    The purchase of LQ by any of the multi-brand hotel operators would be immediately accretive and would give BX a clean exit opportunity.  (The fund does still own 45%+ of HLT.)  

    Additionally, even without a sale, I believe LQ is very punitively valued on earnings growth that is suffering a temporary setback and should be restored.  20x 2017's 85c ==> $17 should be a base case, and 25x ==> $21.25 (+43% upside) is my bull case.

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

    LQ is sold to a multi-brand hotel operator.  Or results stabilize with stable oil prices.

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