Low gas prices and a rapidly improving U.S. labor market are combining to throw a 1-2 punch of profits for hotels, making hotel stocks increasingly appealing to investors.
Of course, the significant decline in gas prices recently has made driving to faraway destinations for vacations much more affordable for middle-class families. Airfares haven’t dropped yet as a result of the decline in airlines’ fuel costs, according to The New York Times. But there is a good chance that ticket prices will decline in the intermediate term, assuming fuel prices stay relatively low, the newspaper indicated.
“While consumers expect price drops to be reflected quickly in the price of gas at the pump, there is typically a lag with (airline) ticket prices,” partly due to the hedges on fuel that the airlines take, the NYT explained.
Still, as traveling becomes cheaper, more middle-class families should be able to take more vacations, which means more booked hotel stays, and a boon for most hotel stocks.
On top of that, it’s obviously much easier to afford a vacation if you’re employed, so the recent surge in U.S. job creation should also spur more Americans to enjoy their leisure time.
Research Firm Upbeat
PKF Hospitality Research — owned by CBRE Group (CBRE), an advisory and real estate firm specializing in the hospitality industry — is extremely upbeat about the outlook for hotels. Earlier this month, it forecast that “all segments of the U.S. lodging industry will enjoy strong performance for the foreseeable future.”
“No matter what hotel performance indicator you look at for any type of hotel, we foresee extremely favorable movements the next few years,” said R. Mark Woodworth, president of the firm.
While PKF Hospitality Research cited improving employment trends as the key reason for its optimism, the firm added that, “the world oil market dynamics are generating prices for transportation fuel that work to the benefit of travelers.”
If oil prices remain at current low levels, hotels will beat expectations in 2015, the firm says.
Hotel Stocks Have Reasonable Valuations
Despite this very positive environment, several hotel stocks are trading at valuations that aren’t too rich. Extended Stay America Inc (STAY) stock is trading at 19 times analysts’ consensus 2015 earnings estimates, while Wyndham Worldwide Corporation (WYN) stock comes in at about 16.5 times the consensus 2015 EPS outlook. InterContinental Hotels Group PLC’s (IHG) price-to-earnings ratio of about 23 times the 2015 consensus outlook isn’t too extended, considering it also carries a dividend yield of nearly 2%.
And keep in mind that PKF Hospitality Research said that hotels’ 2015 results will beat expectations if oil remains low, which should help propel these stocks without overextending them.
Moreover, hotel stocks are ready for a push, having been mostly mute over the past three months. For example, IHG stock is up just 3% in that period while Hyatt Hotels Corporation (H) stock is down 6% and Starwood Hotels & Resorts Worldwide Inc (HOT) has registered a 5.5% loss — all while the S&P 500 has ripped off nearly 6% gains.
All of these stocks stand to gain from America’s economic double whammy, though investors looking to stay protected — namely, those who want to avoid dealing with economic turbulence in China, the eurozone and Russia — should consider STAY stock and LaQuinta Holdings Inc (LQ). All of those companies’ hotels are located in North America.
With rapidly improving employment, low gas prices and reasonable valuations, hotel stocks are poised to perform well. Investors can buy at will.
As of this writing, Luke Rollins did not hold a position in any of the aforementioned securities.