Hotel Stocks Could Cure the Summertime Blues

With just a quick glance at the headlines, it would be easy to conclude that the so-called “smart money” didn’t see a very compelling future for hotel stocks.

hotel stocks, hlt stockSpecifically, the recent decision from private equity and asset management firm Blackstone Group LP (NYSE:BX) to shed another wide swath of its stake in Hilton Worldwide Holdings Inc (NYSE:HLT) could broadly be extrapolated as evidence that professional investors aren’t too keen on comparable names like Marriott International Inc (NASDAQ:MAR) or Hyatt Hotels Corporation (NYSE:H) either.

A longer look at the bigger picture, however, might not support such a bearish thesis on hotel stocks like HLT or MAR stock.

As it turns out, the lodging industry is (quietly) doing surprisingly well right now, and could end up being one of the market’s rare summertime gems.

Don’t Read Too Much Into It

Yes, while the market is getting 103.5 million additional shares of HLT stock, it’s not as if Hilton is looking to raise money and dilute the market. It’s Blackstone Group, and the private equity firm’s position in Hilton Worldwide has been in place since 2007.

After eight years, the fund has a right to take a little profit.

And calling a spade a spade, now’s the right time to book a gain on the trade. HLT stock is up nearly 35% since Blackrock took the company public in late 2013 at a price of $20 per share. Moreover, though revenue and earnings growth has been impressive since 2009, the forward-looking price-to-earnings of 28.7 is still a little frothy compared to its peers … and market history.

Blackrock’s exit of its Hilton Worldwide Holdings trade is hardly an indictment of all hotel stocks, however.

Lots of Solid Results

Though first-quarter earnings season isn’t over yet, we’ve already seen more than a handful of great Q1 results from hotel stocks.

Take Starwood Hotels & Resorts Worldwide Inc (NYSE:HOT). The company earned 65 cents per share last quarter, topping the market’s average estimate for 57 cents, and the company’s own Q1 guidance for a profit of somewhere between 53 to 57 cents per share of HOT stock.

Wyndham Worldwide Corporation (NYSE:WYN) is another one of those hotel stocks with better-than-expected results for the first quarter of 2015. Income of $1.03 per share of WYN stock was not only up 32% on a year-over-year basis, but handily topped analyst estimates for a bottom line of 93 cents per share.

The aforementioned Marriott International also aced earnings estimates for the first quarter of the year on the heels of a big 6.8% spike in the amount of revenue per available room (RevPAR). Hyatt Hotels saw a solid increase in its RevPAR as well, with 3.8% growth in that particular metric during its first quarter, even though overall revenue fell slightly. Earnings of 11 cents per share of H stock fell short of the estimated figure of 19 cents.

In the midst of an earnings season plagued by companies lamenting the strength of the U.S. dollar in the shadow of Q1’s GDP estimated growth rate of only 0.2% — neither of which particularly lend themselves to heightened hotel activity — it’s a surprising amount of strength from an entire industry.

What gives?

Perhaps above all else, the strong U.S. dollar hasn’t been the headwind for hotel stocks that most observers felt it might be. In fact, Starwood said it doesn’t see a material decrease in inbound international travelers at all during the first quarter. Both Starwood and Pebblebrook Hotel Trust (NYSE:PEB) management teams, however, both mentioned something that most other hotels at least alluded to.

As Pebblebrook CEO Jon Bortz explained:

“Industry demand significantly outpaced supply due to healthy increases in business transient, leisure and international inbound travel, as well as the first signs of meaningful improvement in group demand.”

Starwood CFO Tom Mangas said in its conference call:

“Group demand in North America has been good with group revenue in the quarter up over 6% at our owned and managed hotels. Corporate group was very strong, up nearly 10% versus last year.”

Reading between the lines (and not necessarily just between the lines), with groups and business travelers back in the fold, the hotel industry might finally be on the cusp of a full recovery, with the impact of the frothy U.S. dollar at least offset by the lower airfares spurred by ultra-cheap crude oil.

Bottom Line for Hotel Stocks

While we’re already seeing a combination of beneficially low oil prices against a backdrop of employment and wage progress — despite the first quarter’s muted economic growth — there’s still room for hotel stocks to post upside surprises.

PKF Hospitality Research President Mark Woodworth noted in January how it can take a while for low crude oil prices to fully trickle down to boost the bottom lines for hotels, depending on the mode of transportation to the destination.

For vacationers and travelers driving to hotels, the benefit of cheap gasoline was immediate, and measurable for hotel stocks as of Q1. Some airlines contract jet fuel prices months in advance, though, and many air carriers may still be charging customers based on last year’s pricing. As these prices continue to be replaced by lower-cost jet fuel, airfares should continue to fall, spurring even more domestic and international hotel stays. As Woodworth put it:

“In the near term it’s going to be the leisure ‘drive to’ type of demand. Longer term we’re likely to see some relaxation in airline prices.”

In other words, Q1 wasn’t apt to be a fluke. These hotel stocks are rather well-positioned to better in 2015 than most investors may be expecting.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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