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Stocks in this article: HLT MAR IHG BX

During this period, Hilton increased its focus on the international markets. The company's rooms outside the U.S., which are under construction, increased by almost 80% from less than 15% in 2007, while rooms in its development pipeline outside of the U.S. increased from less than 20% to more than 60%. In China, Hilton has 171 hotels opened or under development, a big jump from just six hotels in 2007.

During the first six month of the current year, Hilton reported a 2.7% year-over-year increase in revenue to $4.64 billion, while its net income jumped 65.8% to $189 million. The increase was due to higher room rates and better occupancy rates.

On the other hand, Hilton has a lofty debt-to-equity ratio, which is about 10 times as large as the industry's average. The business has total debt of $15.1 billion, which takes its debt-to-equity ratio to 560%, considerably higher than industry's average of just 58%.

Although Hilton's balance sheet isn't perfect, the situation isn't alarming either. The company reduced its debt significantly (by $4 billion) on the back of the debt restructuring in 2010. Moreover, management has demonstrated its cost discipline and its ability to increase cash flows from operations. That caused a $2.4 billion drop in long-term debt between the end of 2010 and mid-2013. Plus, the company will use some of the proceeds from the IPO to deleverage. In short, although Hilton has high leverage but it is heading in the right direction.

The company also increased its focus on the higher margin fee-based 'management and franchise' segment and the capital efficient timeshare segment, as opposed to the ownership segment. The two former segments are far more lucrative and will improve the company's ability to generate cash flow in the coming years.

More importantly, Hilton's future looks very promising. No single hotel company enjoys more than 5% market share (in terms of hotel rooms) in the international market and more than 10% market share in the U.S. market. In international and domestic markets, Hilton is right at the top with a 5% share in the global market, ahead of InterContinental Hotels Group (IHG), and a 10% share in the U.S. market, ahead of Marriott International (MAR).

Since Hilton holds the largest market share, it could benefit the most from the recovery in the hotels and lodgings market. The hotel industry, which reported a 6.8% increase in revenue per available room last year, expects a 5.7% improvement this year and 6% in 2014. The growth in the demand for rooms continues to outpace the supply and this trend will likely continue through at least 2015. That would translate into further improvement in Hilton's earnings.

At the time of publication the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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