What a time it’s been for Playa Hotels & Resorts. In the past six months alone, the company’s stock price has increased by a massive 71.1%, reaching $13.28 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now the time to buy Playa Hotels & Resorts, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

We’re glad investors have benefited from the price increase, but we're cautious about Playa Hotels & Resorts. Here are three reasons why you should be careful with PLYA and a stock we'd rather own.

Why Is Playa Hotels & Resorts Not Exciting?

Sporting a roster of beachfront properties, Playa Hotels & Resorts (NASDAQ: PLYA) is an owner, operator, and developer of all-inclusive resorts in prime vacation destinations.

1. Weak RevPAR Growth Points to Soft Demand

We can better understand Travel and Vacation Providers companies by analyzing their RevPAR, or revenue per available room. This metric accounts for daily rates and occupancy levels, painting a holistic picture of Playa Hotels & Resorts’s demand characteristics.

Playa Hotels & Resorts’s RevPAR came in at $325.50 in the latest quarter, and over the last two years, its year-on-year growth averaged 10.2%. This performance was underwhelming and suggests it might have to invest in new amenities such as restaurants and bars to attract customers - this isn’t ideal because expansions can complicate operations and be quite expensive (i.e., renovations and increased overhead).

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Playa Hotels & Resorts’s revenue to rise by 1.1%, a deceleration versus its 4.7% annualized growth for the past two years. This projection doesn't excite us and implies its products and services will face some demand challenges.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Playa Hotels & Resorts historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 3.6%, lower than the typical cost of capital (how much it costs to raise money) for consumer discretionary companies.

Final Judgment

Playa Hotels & Resorts isn’t a terrible business, but it isn’t one of our picks. Following the recent rally, the stock trades at 26.9× forward price-to-earnings (or $13.28 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are superior stocks to buy right now. Let us point you toward one of our top digital advertising picks.

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