After summer unofficially started after Memorial Day weekend, vacations in 2020 will be completely different. The U.S. is only in the early phases of a re-opening, so most consumers will limit their travel. Why should investors in hotel stocks bet that people will plan for vacations in the next couple of months?
If national parks are summer’s go-to vacation spots, then markets may already have paid too much for hotel stocks. Despite the steady rally, vacation-related stocks in the airlines and cruise ship sector are also up. As a result, investors could bet on vacationing restarting in the next few weeks.
Plus, the government is slowly allowing and even encouraging travel among the States. This will fuel a continued rally in the following seven hotel stocks:
- Marriott International (NASDAQ:MAR)
- Hilton Worldwide (NYSE:HLT)
- Wynn Resources (NASDAQ:WYNN)
- MGM Resorts International (NYSE:MGM)
- Hyatt Hotels (NYSE:H)
- Royal Caribbean Cruises (NYSE:RCL)
- InterContinental Hotels (NYSE:IHG)
Marriott International (MAR)
In the first quarter, Marriott reported earnings of 26 cents a share, down from $1.41 a share last year. The company included a 45 cent impairment charge and bad debt expenses. It took another 42 cents a share for guarantee reserves. The wash-out quarter suggests that earnings may only bounce from here.
In the last quarter, Marriott started the year with strong momentum. But revenue per available room (RevPAR) fell 90% worldwide. A RevPAR stabilization in April suggests that its businesses in Greater China will continue to recover first. Occupancy will climb slowly but steadily in North America next. In Europe, where Marriott shut down three-quarters of its hotels, the business re-opening should help its revenue.
CEO Arne Sorenson said that when beaches reopened in early May, “the Ritz-Carlton Bacara in Santa Barbara and our hotels in Hilton Head, South Carolina, for example, were expected to reach approximately 50% occupancy based on reservations on the book.”
17 analysts covering MAR stock have an average price target of $91.40 (according to Tipranks). Conversely, with an 8% discount rate and a terminal revenue multiple of 7.1 times in a 5-year discounted cash flow revenue exit model, Marriott is worth ~$95 a share.
Hilton Worldwide (HLT)
Hilton Worldwide reported non-GAAP earnings per share of 74 cents. Revenue fell 12.7% year-over-year to 41.92 billion. RevPAR fell by 22% to 24% in the first quarter.
Hilton bought back 2.6 million shares at an average price of $107.26. Unfortunately, it suspended the buyback and dividend payments on March 26, when the stock traded at nearly half that price. Despite the poor timing, business is starting to improve, led by a reopening of all 150 hotels previously closed in China. And while the recovery in hotel stocks may start with increased vacationing in the months ahead, a full recovery could take a few years.
Chris Nassetta, Hilton’s CEO, said, “I think an even better argument that people are going to want to see people more than ever.” If the hotel chain adds the necessary precautions like extra cleaning and the use of masks, people feel safer and are more likely to book a Hilton hotel room.
On Wall Street, the average price target is nearly $78 (per Tipranks). Conversely, the stock has a fair value of below $55, due to unfavorable P/E and price/sales. Still, HLT stock scores an 82/100 on quality:
| HLT | Industry | S&P 500 | |
| Quality Score | 82 | 58 | 79 |
| Gross Margin | 87% | 44.2% | 29.2% |
| Operating Margin | 15.7% | 11.5% | 13.3% |
| Net Margin | 8.10% | 7.5% | 8.8% |
Data courtesy of Stock Rover
If consumer interest in vacations grows, Hilton is one of the first hotel firms that will benefit.
Wynn Resources (WYNN)
A planned reopening of the gaming industry in Nevada will help Wynn Resources and other hotel stocks. The company needs casinos open again after it reported revenue dropping 42.3% to $953.7 million in Q1/2020. Though it suspended its quarterly dividend, the savings will help offset the near-term losses ahead.
When Las Vegas casinos re-open, Wynn will not benefit right away. Visitors will not get to play poker. A true and fuller reopening of the casinos will require regular customer and employee screening. By lowering the chances of spreading Covid-19, people will be less afraid of visiting.
CEO Matt Maddox said that “when any employee and any customer that wants to swab test, you can get it we have it on-site. We have three various antibody tests that are going through EUA approval right now and one that already has it that we’re working on. That will also be available.”
Investors should not expect a strong surge in economic activity at the beginning of the reopening. Wynn is not yet opening that many locations. But as long as more locations re-start business, the increase in bookings will happen at a measured pace.
The average price target on WYNN stock is $95.40 (from Tipranks). Conversely, investors may assign a low terminal revenue multiple and come up with a fair value of around $76 a share (from this finbox model).
MGM Resorts (MGM)
Typical of any optimistic executive, MGM Resorts CEO Bill Hornbuckle said that “there’s those who will come immediately, irrespective of the health concerns. There’s a bucket of people that we need to convince that it’s safe and it’s still a fun and encouraging and engaging environment.” So, investors should look at vacationing numbers in Las Vegas in the weeks ahead. If visitor numbers bounce back better than thought, then MGM stock will continue its uptrend that began in mid-March.
In the first quarter, MGM reported an EPS loss of 45 cents (non-GAAP). Revenue fell by 29.2% to $2.25 billion. It also cut its dividend. This will allow the company to preserve its cash flow and to invest back in the business. CFO Corey Sanders said that the company burned through $270 million a month. For now, an amended credit agreement and a debt raise will lift the company’s liquidity. And when its resorts reopen again, MGM will slow its near-term losses.
The average price target on MGM stock is $16.75. Conversely, based on its future cash flow, simplywall.st thinks the stock is worth almost $27.
Hyatt Hotels (H)
Hyatt reported RevPAR falling by 28.1% Y/Y in the first quarter. This fell by 24.5% for U.S. hotels. CEO Mark Hoplamazian noted the tough operating conditions in the period and said it had enough liquidity for at least 30 months of operations.
Looking ahead, Senior Vice President Brad O’Bryan said, “you will likely see stronger demand in drive to resorts and leisure destinations initially. We believe business transient travel will follow as businesses ramp up their activities.” With business travel restrictions, Hyatt will rely on vacation demand to pick up in the summer.
Investors need to look for leading indicators that will follow with stronger bookings at Hyatt. The CEO said, “we’ll have to see how some of the change in the guidelines that are currently prohibiting or diminishing travel, once they start to come off, what the evolution is going to look like. A lot of that will be dependent on people getting on airplanes.”
A Stock Rover alert notes that H stock has a 13.5% short percentage of float. The bearish bet against hotel stocks like Hyatt could pay off until the company reports higher occupancy rates, which could start happening in early summer.
Royal Caribbean Cruises (RCL)
Royal Caribbean is technically not a hotel stock, but its cruise ships have many guest rooms available. In the first quarter, the company reported a GAAP EPS loss of $6.91 as revenue fell 16.8% Y/Y to $2.03 billion.
The company faced a deteriorating bookings count starting in mid-February. This fell to the lowest level by mid-March. CFO Jason Liberty said that “while bookings still remain suppressed, they are better now than they were in mid-April, driven by improved trends for the fourth quarter of 2020 and 2021 sales.
RCL stock will continue to get a lift as bookings improve. The company is not immune to elevating risks of another Covid-19 outbreak in the months ahead. But customers may book trips without fear of losing money. Royal is giving plenty of flexibility in re-booking and cancellations should safety circumstances change.
Health regulators may push back the permitted departure dates, which would increase risks for Royal Caribbean investors. It has $12.27 billion in long-term debt. The company added $4 billion in debt to boost its liquidity while reducing debt maturities down by $400 million for the rest of 2020. So, if the Centers for Disease Control lets Royal resume some cruises in the next few months, the company will generate some much-needed cash flow.
InterContinental Hotels (IHG)
Negative sentiment peaked for InterContinental Hotels stock on March 20. The company posted hotel demand at the lowest it ever saw in the first quarter of the year. RevPAR fell in January and February, forcing the company to defer dividend considerations, cutting costs by $150 million.
The lockdown lift that began in Europe and followed in the U.S. offers some hope for IHG stock. As the company expands its cleanliness program followed by an enhanced effort launch on June 1, vacationers will have more confidence in staying at InterContinental.
IHG partnered with Ecolab and Diversey in 2015 to get hygiene and cleaning services. The company announced that they “… will practice social distancing, provide employee training and certification, provide hand sanitizer and wipes, increase contactless interactions, provide additional deep cleaning of high-touch surfaces and provide new standards for food and beverage service.”
Investors in hotel stocks may brace for a sharp decline in cash flow in the current quarter as reservations in the U.S. and Europe fall. But as travel restrictions start to ease, IHG will have a better idea of the booking rates in the months ahead. It may balance operational expenses in line with customers returning to its hotels.
As of this writing, the author did not hold a position in any of the aforementioned securities.
