Hilton profit rises, but weak forecast hits stock

LOS ANGELES - Hilton Hotels Corp. have reported an increase in quarterly profit on higher room rates but said 2006 earnings would fall below Wall Street estimates, sending its shares down 3.5 per cent.

The company, in talks to buy the international lodging business of Britain's Hilton Group Plc., said profit margins at hotels it owns improved in the third quarter on strong travel demand, with Hawaii and New York the top destinations.

But rising energy prices, Hurricane Katrina's closure of hotels in New Orleans, and the recent sale of a Boston hotel will trim its growth rate through next year, it said.

"I would expect energy prices to increase in the double digits" next year, Chief Financial Officer Robert LaForgia said on a conference call.

Third-quarter net income increased 46 per cent, to US$89 million ($128 million), or 22 cents a share, from US$61 million, or 15 cents a share, a year earlier. The results topped analysts' average forecast of 20 cents a share as compiled by Reuters Estimates.

Revenue rose 7 per cent to US$1.1 billion.

Revenue per available room, a key measure of health in the lodging industry, rose 13.3 per cent at owned hotels, excluding New Orleans. So-called revpar is expected to increase about 11 per cent for the full year, the company said.

"The quarter was pretty good. The 13.3 per cent is impressive," said Robert LaFleur, an analyst at Susquehanna Financial Group.

Hilton said it did not buy back any shares during the quarter, citing the talks with Hilton Group.

LaFleur said investors have shied away from Hilton since news earlier this month of the talks with Hilton Group. The deal would give Beverly Hills, California-based Hilton some 400 properties outside the United States and reunite the Hilton brand after more than 40 years.

"Investors bought into Hilton's strategy of selling assets, buying back stock and moving to a more fee-based business ... This would be a dramatic shift in strategy," LaFleur said.

Hilton narrowed its full-year 2005 earnings forecast to about US$1.05 a share, from its previous range of US$1.05 to US$1.07 a share.

The company said the outlook includes a loss of 2 cents a share related to Hurricane Katrina. Hilton owns the Hilton New Orleans Airport hotel and has a 75 per cent stake in a 1,600-room hotel adjacent to the city's convention center.

The company expects insurance to cover its hurricane-related losses.

For 2006, Hilton projected revpar growth of 8 per cent to 10 per cent, and earnings per share of 97 cents to US$1.03. Analysts' average earnings forecast is US$1.04 per share.

"Investors may take issue with below-consensus 2006 (earnings) outlook despite the strong (revpar) forecast," Deutsche Bank analyst Marc Falcone said in a report.

Hilton's stock has risen almost 25 per cent since August 2004, when US hotel chains began raising room rates after a three-year slump following the Sept. 11 attacks.

But the stock is down more than 10 per cent for the year to date, compared with a drop of about 8 per cent in the S&P Hotels Index, amid concern that rising energy costs and interest rates will cut into travel demand.

The stock was down 70 cents to US$19.11 in afternoon trade on the New York Stock Exchange.

Hilton operates hotels under the Hampton Inn and Embassy Suites brands as well as its flagship name. At Sept. 30, the Hilton system included 2,357 properties.

- REUTERS