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Host Hotels & Resorts — How to Play Wednesday’s Earnings Report

HST has offered cautious guidance, but its stock appears oversold


Host Hotels & Resorts (NYSE:HST), a real estate investment trust, reports earnings for the quarter ended September 30 on Wednesday before the market opens. The news should put to bed fears that a dramatic slowdown in economic activity is on the near-term horizon.

The hotel industry is very cyclical. When the economy is strong, business and holiday travel increase. When the economy is weak, travel spending drops. The economic wheel is spinning at this point, though, and where it stops, nobody knows.

Earnings can help markets focus on fundamentals instead of speculation, at least in the near term. Host Hotels shares have sold off heavily since early July. The bet is that earnings estimates have been too high. Of course there is little in recent performance to suggest a slowdown is imminent.

During the past four quarters, Host Hotels has been within a penny either way of average Wall Street estimates:

Host Hotels

When Host Hotels reported results for the period ending June 30, it reduced estimates for a key industry metric, revenue per available room. The company also said that full-year funds from operations would be 87 to 91 cents per share. Funds-from-operations estimates at the time were 92 cents per share for the full year.

Currently, the average estimate for the period ending Sept. 30 is 16 cents per share. Ninety days ago, the estimate was at 18 cents per share. For the full year, estimates now stand at 91 cents per share. In the following year, funds from operations are expected to grow by 24% to $1.13 per share. At current prices, shares of Host trade for just 12 times current year estimates.

Host Hotels
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Shares of Host Hotels fell off the cliff in July. The stock is down 36.5% since the end of June. Prior to the collapse, shares had traded mostly flat since October of last year.

Slightly lower guidance at the time of Host Hotels’ last earnings report was followed by vicious selling of the stock. The action seems overdone. Hotel operator Marriott International (NYSE:MAR) reported earnings results last week that met analyst expectations, but beat on the top line thanks to higher revenue per room.

Marriott issued the obligatory cautious statement regarding the remainder of the year. Can you blame them? With many calling for recession, it is only wise for management to be conservative with guidance. Shares of Marriott moved slightly higher after it released its report.

Host Hotels’ shares are cheap relative to expected growth. The company recently reduced guidance for revenue per room. With Marriott showing improved revenue per room, perhaps Host Hotels’ reduced guidance went too far. At a minimum I believe it is reasonable to assume that guidance will not be further reduced.

Look for the company to meet or beat reduced expectations when it reports results on Wednesday. Guidance should be affirmed — and if so, shares of Host could see a pop of 5% or more, especially if earnings beat expectations.

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