As summer officially kicks off this week, hotel chains have great expectations for strong vacation-driven profits. But despite strengthening consumer confidence, some hotel chain stocks are better positioned to cash in on industry trends than others.
The rise in U.S. consumer confidence is fueling growth in the hospitality industry, and many properties are poised to build upon last year’s gains. In 2012, upper midscale hotel chains in the U.S. averaged profit growth of more than 7%, according to STR Analytics’ new 2013 HOST Almanac. Performance at luxury chains was even stronger, averaging profit increases of 15%, although economy and midscale chains averaged flat growth.
Those trends are continuing this year: e-forecasting.com’s Hotel Industry Pulse index had a positive rate of 4.9%, which translates into stronger industry momentum. Economic activity at U.S. hotels has increased by 3.5% in the past 12 months.
One caveat: hotel stocks are about as cyclical as it gets, so if the economy turns south, this sector will follow suit fast (as investors learned in 2009). But as consumer confidence buoys the hotel industry, some properties are a better bet for investors. So let’s weed out the winners from the losers:
Book: Host Hotels & Resorts
Host Hotels & Resorts (HST) is a real estate investment trust that invests in premium upscale and luxury properties such as the Four Seasons, Fairmont Hotels and Resorts and the Ritz-Carlton, in partnership with major brands. The trust most recently acquired the 426-room Hyatt Place Waikiki Beach in Honolulu for $138.5 million.
HST is attractive on a valuation standpoint — its forward price-to-earnings ratio of 12 is below the sector average of 15, and price/earnings-to-growth is 0.95, also indicating it’s slightly undervalued. It also yields a modest 2.3% in dividends.
But it’s Host’s focus on high-end properties — markets that are experiencing the most robust profit margin growth right now — that really puts HST in the sweet spot of the hospitality industry.
Book: Marriott International
With 3,800 hotels in 74 countries and territories, Marriott International (MAR) has long been a high-profile player in the hospitality industry. Key brands include JW Marriott, Renaissance Hotels, Courtyard by Marriott and Fairfield Inn & Suites. MAR also is on the cutting edge of hotel marketing and technology, as illustrated by its “Travel Brilliantly” campaign aimed at Gen X and Millennial travelers.
In contrast to Host, MAR is a bit more frothy at a forward P/E of 17 and a PEG ratio of 1.7, though analysts do expect the chain to grow revenue by a not-insubstantial 7% in 2014.
Although MAR’s dividend yield (1.7%) is nothing to write home about, I think the organization’s innovative marketing approach and strong management make Marriott a growth play if the broader economy cooperates.
Book: Wyndham Worldwide
Wyndham Worldwide (WYN) boasts some 7,380 properties worldwide. Key brands include: Wyndham Hotels and Resorts, Ramada, Days Inn, Super 8, Howard Johnson, Microtel Inns & Suites and RCI. The company has a diversified mix that ranges from economy properties like Days Inn and Super 8 to its luxury Wyndham Grand hotels and resorts. WYN’s time-share network RCI is also experiencing strong performance, with RCI citing a recent survey that 78% of time-share professionals expect 2013 sales to be stronger than last year.
The case for WYN is not as strong as it is for MAR and HST because of its exposure to the economy segment, which is under pressure. However, the company did beat the Street with its first-quarter earnings, which rose more than 18% year-over-year.
WYN’s valuation metrics are good, too, at a PEG of 0.8 and a forward P/E of 14. It also offers a little protection (though not much) via its 2% yield.
Hyatt (H) is an upscale property chain whose hotel and resort portfolio boasts more than 500 properties in 46 countries under the Park Hyatt, Andaz, Hyatt, Grand Hyatt, Hyatt Regency, Hyatt Place and Hyatt House names.
With 45% of its revenue derived from groups, Hyatt has taken it on the chin thanks to the impact of sequestration on federal government business. Group room revenue slipped by 6% in the first quarter — although business travel offset some of those challenges.
Hyatt’s fundamentals resemble those of a mature public utility — its PEG ratio is a whopping 4.8 and its forward P/E is 39, the highest among major publicly traded hotel chains. And worse — Hyatt doesn’t offer any income to compensate.
Meanwhile, Hyatt faces strong competition for business travelers, which is likely to heat up.
Avoid: Choice Hotels International
Choice Hotels International (CHH) operates more than 6,200 hotels in 49 states under the Comfort Inn, Comfort Suites, Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn and Cambria Suites brands. The company’s properties are concentrated in the budget and economy niche — and that potentially poses headwinds for revenue and margins.
Although the company only missed analysts’ earnings expectations by a penny in the first quarter, earnings were down 8 cents a share year-over-year, and CHH’s 2013 guidance is soft.
One notable bright spot, however: Choice launched its SkyTouch technology division in April, which will accelerate its move to sell the cloud-based hotel management software to other industry players.
That said, CHH — which yields 1.8% in dividends — is pretty overpriced, too, thanks to a forward P/E of 19 and a PEG ratio of 4.3.
Although I think SkyTouch could make CHH an attractive opportunity in mid-to-late 2014, I’m not wild about the stock now.
Avoid: Red Lion Hotels
At just $130 million in market cap, Red Lion Hotels (RLH) is the smallest of these chains, operating 51 hotels under the Red Lion Hotels, Red Lion Inns & Suites and Leo Hotel Collection brands.
The art of operating hotels is skewed in favor of large chains that can leverage economies of scale, placing smaller chains like Red Lion at a disadvantage. RLH has struggled with declining margins, although its franchise revenue continues to experience strong growth.
RLH carries a lot of debt — it has only $5.2 million in cash, compared to debt of $79.2 million. Meanwhile, its PEG ratio of negative 1.9 illustrates the fact that Red Lion is losing money. Although the company has done a lot to boost its fortunes — including the launch of a new website and several moves, adds and changes to its property mix — market forces are working against RLH.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned stocks.