Inside Wall Street: Lodging demand rises

Marriott, InterContinental and Starwood lead an early rebound.

By Gene Marcial Jul 12, 2012 10:39AM

The lodging industry was one of the hardest hit sectors of the economy, with the major multinational hotel companies bearing the brunt of the global recession's adverse impact. But as the industry started to recover this year, the same top hoteliers and hospitality companies that reeled from the downturn are now  leading the recovery's early phase.

 

So shares of top-ranking lodging companies, Marriott International (MAR), InterContinental Hotel Group (IHG) and Starwood Hotels & Resorts (HOT), have been on the rise, even as other lodging stocks are still nursing their wounds.

 

Steven Kent, lodging analyst at Goldman Sachs, expects a "solid (second) quarter" for the group as the U.S. revenue-per-available-room (RevPAR) stays strong, in part driven by the fact that the lodging supply has not increased even as global demand has been improving.

 

"There are no indications that supply is increasing in the U.S., and global demand growth remains positive even if it is slowing in certain regions," says Kent in a report on the lodging industry. For the big three (Marriott, Starwood and InterContinental), "we believe trends should be good, although we would expect Marriott to show the best RevPAR growth given its U.S. focus and recent trends picking up in group business," notes Kent.


Marriott

"As our favorite name in our coverage, we expect Marriott to benefit from the positive industry trends we are currently seeing," says Kent. Given Marriott's heavy exposure to the U.S., about 80% of total rooms, he expects the company to benefit from a strong U.S. RevPAR environment of about 7%. At its Investors Day held in China in June, Marriott highlighted its expansive pipeline, saying it will add more than 100 hotels by 2014, with nearly 40 in China alone. Today Marriott has 22,800 managed rooms in China.

 

Shares of Marriott are trading at $38 a share, not far from its 52-week high of $40.45, and way up from its 52-week low of $25.49 last year. David Loeb, analyst at investment firm Robert W. Baird, who rates Marriott as "outperform," figures that with its "solid balance sheet and significant free cash flow generation," the company will earn $1.64 a share in 2012 and $1.90 a share in 2013, up from 2011's $1.40 a share.

 

Zacks Investment Research, which rates the stock as "outperform" with a 12-month price target of $44 a share, has higher earnings forecasts of $1.66 a share for 2012, and $2 per share for 2013. In a recent report on Marriott's prospects, Zacks said the company's strong pipeline, significant international exposure, solid balance sheet, aggressive buyback strategy and lower operating cost structure, augur well for its earnings growth prospects. It notes that Marriott has been increasing its market share in its various markets.

 

Starwood

Goldman Sachs's Kent expects the biggest news could come from Starwood as it has indicated it is in talks to sell some of its hotels, and "it could announce something bigger on the capital allocation front," he says.

 

Starwood, which is one of the world's largest lodging companies with more than 1,000 hotels in about 100 countries, is positioned to benefit from international economies, "and we expect major metropolitan markets, in which Starwood has higher exposure, to outperform over the long term," says Esther Kwon, analyst at S&P Capital IQ, who rates the stock a "buy."

 

Its hotel brands include St. Regis, which is in the luxury-hotel category; Sheraton, a full-service hotel and resorts; and W boutique, which are full-service urban hotels. Although Kwon is worried over the mixed economic data in the U.S. and the turmoil in Europe, she believes limited supply growth in the U.S. and Europe and Starwood's greater exposure to faster-growth Asian markets could partially offset those concerns and favor Starwood's prospects.

 

Starwood's stock has been moving higher, to $51 a share, up from a 52-week low of $36 on Oct. 3, 2011. Kwon sees the stock rising to $69 a share in 12 months. After selling much of its owned-hotel portfolio over the past several years, receiving about $5.6 billion for them, Starwood now primarily focuses on maximizing earnings and cash flow by managing and franchising hotels.


InterContinental

On InterContinental, the world's largest hotel group by number of rooms, Goldman Sachs's "buy" recommendation is based on its improving RevPAR, which was up 7.7% in 2012's second quarter, beating most analysts' forecast. Its stock is trading at $24 a share, up from its 52-week low of $15 hit on Nov, 25, 2011. The company owns, leases, franchises or manages more than 4,500 hotels and over 661,000 guest rooms in 100 countries. Among its brand hotels: Crowne Plaza, Holiday Inn, Candlewood Suites, Hotel Indigo, and InterContinental.

 

Fred Lowrance, analyst at Avondale partners, who rates the stock as "outperform," has raised his 12-month target for the stock to $29 from $27. "While the shares have performed well year-to-date, we believe there is still recent upside remaining, given earnings growth prospects and the current valuation discount relative to peers," says Lowrance.

 

He's positive on 2012 and beyond, says the analyst, encouraged by its RevPAR gain of 5.2% in Europe last April. And Lowrance expects a continuation of strong demand trends in the U.S. and China. Looking beyond 2012, the analyst says "persistent positive industry trends, significant exposure to high growth emerging markets, and the return of more substantial system growth should continue to support InterContinental's healthy RevPAR and earnings growth."

 



Gene Marcial wrote the column “Inside Wall Street” for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.

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