Is Now The Time To Buy InterContinental Hotels?

The Motley Fool

I'm always searching for shares that can help ordinary investors like you make money from the stock market.

So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.

Today I am looking at InterContinental Hotels (LSE: IHG) (NYSE: IHG.US) to determine whether you should consider buying the shares at 1,770p.

I am assessing each company on several ratios:

Price/Earnings (P/E): Does the share look good value when compared against its competitors?

Price Earnings Growth (PEG): Does the share look good value factoring in predicted growth?

Yield: Does the share provide a solid income for investors?

Dividend Cover: Is the dividend sustainable?

So let's look at the numbers:

Stock

Price

3-yr EPS growth

Projected P/E

PEG

Yield

3-yr dividend growth

Dividend cover

InterContinental Hotels

1,770p

28%

19.8

4

2.3%

12%

2.5

The consensus analyst estimate for this year's earnings per share is $1.42 (5% growth) and dividend per share is 70 cents (11% growth).

Trading on a projected P/E of 19.8, InterContinental appears significantly more expensive than its peers in the Travel & Leisure sector, which are currently trading on an average P/E of around 16.3.

Unfortunately, InterContinental's relatively high P/E and low single-digit near-term growth rate give a PEG ratio of around 4, which implies the share price is extremely expensive for the near-term earnings growth the firm is expected to produce.

InterContinental offers a 2.3% yield, which is currently around the same as the sector average. Furthermore, InterContinental has a three-year compounded dividend growth rate of 12%, implying the payout may continue to grow in-line with the payouts of the company's peers.

In addition, the dividend is about two-and-a-half times covered, giving InterContinental plenty room for further payout growth. InterContinental also returned $1bn to shareholders during 2012 through a special dividend and share buybacks.

InterContinental looks expensive, is this justified?

As I say, InterContinental does look expensive for the near-term growth it is expected to produce. On the other hand, I believe InterContinental's share price does deserve a premium over its peers as the company is the largest hotel operator in the world. Furthermore, InterContinental is also the largest international hotel operator in China.

I believe the majority of InterContinental's success is down to the firm's operating structure. You see, InterContinental actually owns only 10 of the 4,500 hotels it has operating under its brands -- the rest of the hotels are either managed or leased.

Furthermore, I can see this low-cost operating structure is key to the group's extremely profitable business. Indeed, in the three months to September 2012, InterContinental reported a solid 30% gross profit margin. In addition, high cash generation has allowed the group to reduce its net debt from $644m down to $472m during 2012.

Nonetheless, InterContinental shows no sign of slowing down. As of September 2012, InterContinental had a pipeline of 165,000 rooms under construction, which would increase the current room count by around 20%.

However, despite the bright outlook for InterContinental, I believe the current valuation is too high for the low near-term growth the company is expected to produce. So overall, I believe now does not look to be a good time to buy InterContinental Hotels at 1,770p.

More FTSE opportunities

Although I feel now may not be the time to buy InterContinental Hotels, I am more positive on the FTSE shares highlighted in "8 Dividend Plays Held By Britain's Super Investor". This exclusive report reveals the favourite income stocks owned by Neil Woodford -- the City legend whose portfolios have thrashed the FTSE All-Share by 200% during the 15 years to October 2012.

The report, which explains the full investing logic behind Mr Woodford's dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.