With a massive vaccination program underway globally, there is a glimmer of hope for hotel stocks, which have been struggling since just about this time last year.
Just to put things into perspective, the hospitality industry has lost four million jobs since fiscal year 2019. The novel coronavirus pandemic completely stalled business and leisure travel, and the airline and hospitality industries have continued to suffer.
According to one research finding, 56% of Americans are ready to travel for leisure in FY2021. Further, 34% of adults are already comfortable staying in a hotel.
In another estimate, CBRE Hotels Research forecasts 55.7% national level occupancy in hotels for the second half of 2021. Yet another study estimates 52.7% hotel occupancy for the current year.
Given this outlook, it’s very likely that hotel occupancy will improve towards the summer season. It would not be a bad idea to consider some exposure to hotel stocks.
However, it’s important to mention that business travel is unlikely to recover anytime soon as many companies will continue to reap the benefits of teleconferencing. Peak hotel traffic therefore won’t return to normal in the next 24 months, but the markets will be happy with a gradual recovery.
Let’s therefore talk about three hotel stocks that can turn hot before the summer season.
- Hilton Worldwide Holdings (NYSE:HLT)
- Marriott International (NASDAQ:MAR)
- Wyndham Hotels & Resorts (NYSE:WH)
Hotel Stocks: Hilton Worldwide Holdings (HLT)
HLT stock was named among Bank of America’s top stocks for FY2021. Even with the devastating impact of the pandemic, HLT stock has remained resilient. At $112, the stock is almost at the same levels as it was a year before. If industry recovery does gain traction in the second half of the year, HLT stock can surge higher.
One factor that I like about Hilton is the company’s aggressive growth stance. For the third quarter of 2020, the company approved 17,400 new rooms for development. Hilton’s development pipeline stands at 408,000 rooms as of Q3 2020.
Hilton is positioned for strong growth once it navigates the pandemic impact. The U.S. accounts for 84% of the company’s adjusted EBITDA and is likely to remain the key cash flow driver.
From a financial perspective, Hilton has $7.1 billion in net debt and a net leverage of 5.8. However, I don’t see its high leverage as a concern. The hotel company has no debt maturity through FY2023. Further, with a last-twelve-month adjusted EBITDA of $1.2 billion, debt servicing is likely to remain smooth.
Overall, Hilton has strong fundamentals and a strong growth pipeline with a focus on the U.S. and Asian Pacific. Once leisure and business travel momentum picks-up, the brand is well-positioned to deliver healthy cash flows. At current levels, HLT stock is attractive for investors betting on a second-half recovery for the industry.
Marriott International (MAR)
Over a one-year period, MAR stock has a negative 14%return. However, in the last six months, the stock has delivered 34.8% returns. This is a clear indication of the stock discounting potential recovery in the current year.
Marriott International also has a deep pipeline of new hotels and rooms. As of Q3 2020, the pipeline stood at 29,000 hotels and 496,000 rooms. Further, 228,000 rooms were under construction as of Q3 2020. Therefore, capital investments have remained robust even with one of the worst times for the hotel industry.
It’s worth mentioning that the company’s Q3 2020 hotel occupancy in North America was 37%. This was nearly double the occupancy as compared to Q2 2020. As occupancy and EBITDA improve, I expect MAR stock to trend higher.
From a financial perspective, the company reported net debt of $9.4 billion. Marriott is positioned to deliver an adjusted EBITDA of over $1 billion for FY2020. Therefore, debt servicing is likely to remain smooth. I want to add here that for FY2019, the company reported an adjusted EBITDA of $3.6 billion. Once business and leisure travel improves, Marriott is likely to deliver strong cash flows.
Overall, MAR stock has underperformed as compared to HLT stock over a one-year period. I would not be surprised if the stock does some catching up in the next few months.
Wyndham Hotels & Resorts (WH)
While the last two stocks were from major properties, WH stock is an attractive bet among the relatively smaller names. The hotel has a presence in 95 countries with 796,000 rooms. In addition, Wyndham has a healthy pipeline of 185,000 rooms.
For FY2020, the company reported $327 million in adjusted EBITDA and $100 million in adjusted free cash flows. These are impressive numbers in one of the worst years for the industry. For the current year, the hotel has guided for an adjusted EBITDA of $425 to $450 million.
Another big trigger for Wyndham Hotels & Resorts is business growth triggered by leisure travel. The hotel chain has nearly 70% leisure focus. With leisure travel likely to witness relatively faster recovery as compared to business travel, Wyndham Hotels & Resorts has an edge.
Furthermore, 96% of the company’s U.S. guests originate domestically. Even if cross-country travel remains restricted, Wyndham Hotels is positioned for higher occupancy.
The hotel chain also has a strong financial profile. As of December 2020, the liquidity buffer was $1.2 billion. With no near-term debt maturity and debt servicing likely to be smooth, I expect fundamentals to remain strong.
WH stock is, therefore, an attractive pick at current levels. In the next few quarters, the stock can potentially out-perform the index.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored more than 1,500 stock specific articles with focus on the technology, energy and commodities sector.