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Hilton Hotels (HLT) - Get Hilton Worldwide Holdings Inc (HLT) Report reached an all-time high of $29.79 a share Tuesday morning after reporting solid third-quarter results.

The company earned 31 cents a share, up 48% year over year and 3 cents ahead of the consensus analyst estimate. Revenue doubled to $2.2 billion, reflecting the February purchase of U.K.-based Hilton Group.

The company posted solid organic growth, as measured by a 9.8% improvement in revenue per available room. Higher domestic demand kept room prices moving upward, especially in large cities like New York. Hilton owns and operates a total of 2,800 hotel locations in 80 countries worldwide.

At Tuesday's closing price of $28.92, the stock is already up 20% year to date, doubling the return of the

S&P 500

. Hilton shares also are trading at 26.2 times expected 2006 earnings of $1.10 a share, representing a premium to its historical average valuation, as well as its larger competitors

Marriott International

(MAR) - Get Marriott International, Inc. (MAR) Report


Starwood Hotels



With that in mind, I'm here to answer investors' questions: Should I do it? Is Hilton's stock worth investing in at these levels, or should folks look to hang their hat somewhere else?

One thing is for sure, the company is not shy about its desire to keep expanding. Hilton said it plans to add 225 hotels in 2006 and another 250 next year. The company is targeting 4,000 locations by the end of the decade.

That includes the potential for 100 new locations in China, where Hilton is seeking a development partner. Despite Hilton's grandiose growth strategy, earnings growth is expected to slow to 22% in 2007, down from 30% this year. This would represent the third straight year of decelerating earnings growth.

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But growth doesn't come cheap. President and COO Matthew Hart said on the conference call Tuesday that the company is "not in position" to buy back shares.

By reducing the amount of stock, management can boost earnings on a per-share basis. A repurchase program also helps scoop up any excess supply from sellers and can be a psychological positive to investors that the company believes its shares are worth purchasing with cash on hand.

The company currently has six U.S. properties for sale, in addition to most of the 41 properties acquired from Hilton Group in February, but said it would rather use the proceeds to pay down debt. Hilton finished the quarter with $7.8 billion of debt on the balance sheet, or a hefty 4.5 times expected 2006 EBITDA (earnings before interest, taxes, depreciation and amortization) of $1.74 billion.

The company's debt is currently rated BB by S&P, which is one level below investment grade. As a result, Hilton's aim is to reduce debt to 3.5 times EBITDA by next year. If this happens, Hart suggested a future share-buyback would be possible if the company regains an investment grade rating.

In the meantime, I believe that readers should avoid the stock at current levels. If management explicitly said it doesn't see value in buying the shares at current levels, why should other investors? Like Hilton, I believe that readers should wait on the sidelines, while the company delivers its balance sheet.

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David Peltier is a research associate at In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;

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