 Good day, fellow investors! I recently listened to an interview with Monish Pabrai and he said that in 2009 from the peak in 2007 to till 2009 his fund was down 65%. Now what kept him alive and okay was that he knew he owned value, he knew he owned great value, great businesses and he knew that somewhere in the future those will rebound and that was the case. By 2011 he was back out of his loss of 65% so he was knowing that it will happen somewhere in the future and he was willing to accept that volatility. However to have such conviction on your investments even if they are down 65% you must own great businesses, you must own value and you must buy it at a fair price with a margin of safety. Today we're going to discuss a great business and then it's about you whether it is value now and whether it has the margin of safety required for long-term sustainable investments. For some it will be for some not yet but it's also a stock that I'll put on my watchlist. I'm talking about the Intercontinental Hotel Group and I'll give an overview of the company and I will finish with a valuation, a pricing valuation to see okay what kind of return can we expect over the long term at a certain price that we buy the stock. Let's start with the overview. So the stock is listed on the London Stock Exchange and there are American Depository shares managed by JP Morgan on the New York Stock Exchange. So Intercontinental Hotels is an asset-lite global hotel company, asset-lite means that they do not own the hotels, they only manage and franchise them. So if the company, if the hotel goes bankrupt because there are no customers, they don't lose much except for their fee of their revenue. The pipeline, if we exclude room closures, implies a growth rate of 30% over the next few years as the hotels are being built and contracted. So you're probably familiar with some of their brands from Intercontinental Crown Plaza, Holiday Inn etc etc and they are creating new brands to cater to them in new millennials etc etc. So they are really doing well and this is their brand value, this is what they are selling to their franchisers and this is how they are gaining fees. Their current exposure is really highly weighted towards the Americas but the Chinese pipeline is growing at double digits. Consequently most of the profits come from Americas too for now but China is also profitable, Europe is also profitable and as they grow the number of rooms there, as there is economic development, it is expected that profits would also grow from there. Consequently Asia is the future and that is why in 2017 their number of rooms there grew 16.6%. 2015 presentation shows that they are focusing on those markets still on the US, Greater China is the second market, Middle East is the third market, Germany, UK, Canada, India also, Russia, Mexico and Indonesia are the key 10 markets to focus. Now when it comes to investing in great businesses the key is the business model. With Intercontinental hotels it's all about the fees as they don't own the hotels there is much less capital needed to develop to grow therefore the asset light business model. Further they are also less affected by business cyclicality as the margins are high and their revenues come from the fee on the revenue of the hotel not on the profitability of the hotel, on the revenue of the hotel. So if there is a recession and a hotel loses 20% of revenues Intercontinental hotel will have a 20% decline in the fee and the margins are really high so 40% so even in a deep recession they can protect their long-term profitability which makes this a great business. Even in 2009 Intercontinental hotels with 15% revenues on the global hotel industry still remained profitable when many hotels went out of business. So these are the financial highlights you see total fee revenue is 1.7 billion operating profit is 763 million which is a 42% margin so even if there is a decline of 20% in revenue Intercontinental should still be profitable of course and then you have to weather the storm the stock will probably bleed but that is what I call opportunity. Their margins are increasing in a good environment their free cash flow is very very high and stable at around 500 million they are able to reinvest parts of that cash flow at a high return on capital which constantly increase the cash flow that cash flow is then separated and shareholders are rewarded and this is the dream of every dividend growth investor this is the ordinary dividend progression of Intercontinental's dividend so you can see that they have been growing their dividend for 11% over the last 15 years and this is the ordinary dividend there have been many many special dividends and as they were selling their hotels and rewarding again shareholders so they didn't do stupid things with the money that they have been left over they returned to shareholders and rewarded shareholders now on the risks as always it is important to look at that a company has the net debt is 1.8 billion and most of that is in UK pounds however there is also an interesting lease obligation of 3.3 billion which I always like to see what it is about because some companies don't have that but have a lot of lease obligations short-term ones which are similar but this 3.3 billion in this case is an 88 year long lease for the Boston Intercontinental Hotel which is not material for now as the yearly payments are around 15 million so that's really not material even if it looks like a big deal as a three billion dollar liability so great business great management low risks however there are also other risks we have seen the security breach at Marriott now that will hit the company expected cost of a billion but when you have so much cash and cash flows you can weather that then there is a potential recession that we discussed in the stock market news video on Friday how the yield curve is inverting and yes a recession would hit intercontinental hotels but it will not bring their profitability to below zero they will still be able to perhaps pay their dividend it will not grow but hopefully the stock market the stock price could crash and give us a better entry point but before we discuss the better entry points let's discuss the industry and then see how to go about investing in this that is this is pretty simple there is inflation global GDP growth and developing Asia keen on travel while the developing countries are aging which gives more time to travel this leads to global industry growth and the current situation is much higher than where it was in 2008 it's highly likely that the number of tourists across the world will increase over time even if the growth might be volatile due to recessions etc another risk is airbnb but okay that's a low cost option and the industry is growing that fast that even hotels and airbnb are able to grow at the same time for now we'll see how it will end up but these hotels let's say a hotel is a different thing than an airbnb and there will be a market for everyone probably now with an investing perspective as i said the asset business is light which allows for high dividends which means there is a lot of free cash flow for shareholders and that's nice when you're an investor you want to be rewarded the key is to try and understand where will this company be in 10 years what will be the possible returns given the structure of the business i would dare to assume the dividend growth to continue at 11 percent over the next decade because they are not paying out that much money yet plus there is a lot of special dividends coming when there is more money so let's assume 11 percent growth there if the ordinary dividend grows at 11 percent over the next 10 years the current is 1.04 dollars the 10 year forward dividend will be almost three dollars so as the current ordinary dividend requires 200 million where the cash flows are 500 million the 300 million reinvested should allow for dividend and profits growth in the future so when i put this into a small x shell spreadsheet just to make things easier to comprehend if i lower the current valuation which is 15 to 12 just to be more conservative i add an 11 percent earnings and dividend growth the stock should trade at 93 with a dividend yield of 3 percent in 2028 in the meantime you get dividends between one and three in the next 10 years this means that at the price of 55 which is now the total return should be around 7 percent 2 percent from the dividends and 5 percent from the current earnings yield that's good for some people much better than most of the stocks in the market will do so that's why this is a great business but if we can get the opportunity to buy this at a cheaper price look at the 45 price for a great business 3 percent yield plus a total return of around 14 percent and then if there is a bull market and it goes back to 55 then you make 30 40 percent in two years which even increases your portfolio return however i think that there will be an earnings contraction in the next recession which might give us an opportunity to buy into a great business for a higher return as i said the 45 looks really tempting and it wasn't far from 45 in 2016 2012 it was below almost close to 20 and it was close to 10 in 2009 look at what happened to the stock price from 2007 or above 40 it went down to ten dollars in 2009 for a 65 75 percent downturn so even if it is a great business it can get into trouble on the stock market and this shows how the markets are irrational so let's put this on the watch list and wait for irrational markets if you want to see more companies like this that we watch and we wait for irrational markets please check my stock market research platform there is a 40-day money back guarantee you see my complete research what i did over the last just six months since we started the platform you can expect something similar for every next six months because that's what i do that's what i love doing i love researching stocks and finding the best investment opportunities out there looking forward to your comments any other similar great business ideas please share them in the comments and i'll see you in the next video