There’s been a lot to love about the hotel industry lately.

Stock prices of the major hotel operators have crushed the market over the last decade and many are now trading at all-time highs.

#-ad_banner-#​But is it too late to profit from the bustling hotel industry? In short: no, I believe there is still time.

Occupancy and room rates are still on the rise. And the strengthening economy should only mean higher stock prices for hotel operators.

The real question becomes: what’s the best play on this part of the market?

It just so happens that the world’s largest hotel operator went public at the end of last year. Since its December 2013 IPO, Hilton Worldwide Holdings, Inc. (NYSE:HLT) has outperformed the S&P 500, rising nearly 25% compared to the market’s 10% increase.

The company aims to continue its strong performance by reducing debt, increasing its global presence and unlocking existing shareholder value.

HLT is the world’s largest hotel operator by market cap, revenues and room count. And for savvy investors, it looks like the biggest might be the best in the hotel industry.

At first glance, Hilton is one of the most expensive stocks in the industry. It trades at the second-highest forward P/E ratio among the major operators. A forward price-to-earnings ratio is based on next year’s earnings estimates, or how much one expects to pay for every $1 of a company’s earnings.

But given the company’s size and scale, the premium valuation might well be warranted. Hilton is expected to grow earnings at an annualized 22%, which is close to double most of its major peers.

Low Debt, High Margins

While Hilton is one of the only major hotel operators not paying a dividend, its focus is on paying down debt.

The buyout of Hilton in 2007 by Blackstone, a private equity firm, resulted in the hotel operator increasing its debt to $20 billion. Hilton reduced debt by $250 million in the second quarter of 2014, reducing outstanding debt to about $12 billion since the Blackstone acquisition.

As Hilton continues to de-leverage, more free cash flow will be available for shareholders, which should boost margins.

Going forward, Hilton is looking to transition toward an asset-light business model, meaning a less-capital intensive business with higher margins. One of Hiltons’ major peers, InterContinental Hotels Group, Plc (NYSE: IHG), utilizes a similar model focusing on franchising and branding, versus owning and operating the hotels.

As a result, InterContinental enjoys double digit profit margins. Over the last twelve months, InterContinental sported a profit margin of 14.4%, compared to Hilton’s 5.5%.

More broadly, lackluster growth in the number of hotels being built over the last few years is also a big positive for boosting margins. This means that with limited supply and rising demand, hoteliers will be able to increase prices.

Expanding Hilton’s Global Presence

Emerging markets, in general, should prove to be a great growth opportunity for Hilton. Developing countries will need more hotels to accommodate the rise of domestic and international travelers. Just over three-quarters of Hilton’s rooms are in the United States, leaving plenty of room for emerging market expansion.

In particular, China showed some of the best growth for Hilton during the second quarter, with revenue per available room up 7% year-over-year. China’s population is rapidly on the rise and a market-driving middle class is emerging. Hilton has a total of 50 hotels in the country under the Hilton and Doubletree brands, and has 150 new hotels in the pipeline.

Unlocking Shareholder Value

Another avenue Hilton could take to increase value for shareholders is to unload or renovate some of its valuable assets.

The Waldorf Astoria in Manhattan is on Hilton’s books at a value that dates back to 1949. There’s no doubt it’s worth much more now. Hilton could also spinoff its timeshare business — generating about 15% of Hilton’s revenues. Marriott International, Inc. spun off its timeshare business as Marriott Vacations Worldwide Corp. (NYSE:VAC) in 2011, and since then shares of Marriott International are up more than 120%.

Alternatively, it could redevelop some of its older properties. And that’s exactly what Hilton is doing — the company expects to present a restoration plan for the Waldorf Astoria to shareholders by year-end.

Risks to Consider: Hilton is very much reliant on the broader economy. Any hiccup in the economic recovery could mean poor earnings growth for the company. It also has a more leveraged balance sheet than its peers, putting it at the mercy of third-party partners when it comes to opening new hotels.

Action to take –> Buy shares of Hilton, the world’s largest hotel operator. With its size and international prowess, Hilton has a unique advantage. It can scale in emerging markets much faster than competitors, while also using its breadth to gain attractive pricing with online travel agencies like Expedia and Priceline. Coupled with its top line growth opportunities and emerging market expansion, Hilton is easily the best choice in the hotel industry.

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