After a tough 2013, 2014 started on a better note for hoteliers
with the economy gradually returning to health. Despite patches of
economic and political uncertainty around the world, the global
tourism scenario is encouraging. This trend is expected to pick up
for the remaining part of 2014.
Although, the improving economic backdrop has the potential to
invigorate the hotel sector, certain challenges will persist.
Owners and operators are pressed to achieve profitable growth and
hoteliers will try to capitalize on the improved tourism numbers.
However, higher cost and expenses incurred for renovation and other
digital and marketing initiatives taken by the leading hoteliers to
improve traffic are hurting profits.
In spite of these headwinds, the lodging performance indicators
showed year-over-year improvement. According to Smith Travel
Research (STR), the leading information and data provider for the
lodging industry, the average daily rate (ADR) at U.S. hotels in
Jun 2014 was up 4.3% year over year. Overall occupancy was up 2.9%
year over year.
Notwithstanding the common macroeconomic hurdles, the lodging
sector is expected to continue to recover this year, thanks to an
improving U.S. business as well as strong international travel and
tourism volumes. In fact, the uptrend visible in occupancy rate,
ADR as well as revenue per available room (RevPAR) for the first
and second weeks of July, if it is any clue, indicates a robust
Statistics bear out this relatively favorable environment. A recent
report by PricewaterhouseCoopers (PwC) shows that the lodging
sector will continue to outperform in 2014 and 2015 on the back of
robust booking trend and a solid travel and tourism market. The
market researcher expects RevPAR growth of 6.5% in 2014, driven by
increased ADR of 4.3%, better than 3.9% recorded in 2013. PwC also
added that upscale and luxury segments together will be the major
driver of industry growth.
Furthermore, mega sporting events in South America scheduled in the
second half of 2014 through 2016 are expected to boost tourism. As
owners and operators strive to enhance value and competitiveness,
industry-best practices, like sustainability and brand refreshment,
will remain industry priorities. The currently ended FIFA World Cup
in Brazil also had a significant positive impact.
Demand Exceeds Supply:
The gradual recovery in the broader economy has boosted the hotel
industry as demand is picking up for both leisure and transient
business travel. With limited supply and strong demand, room rates
are seeing an upward movement. According to Hyatt Hotels
) and Hilton Worldwide Holdings Inc. (
), the supply-demand environment in the U.S. is favorable with
healthy demand growth outpacing supply growth that are still below
long-term averages. This would lead to rate increases, thereby
driving RevPAR higher.
In fact, STR expects the sector's demand growth to be 2.6% in 2014
in the U.S. with only 1.2% increase in supply.
The North American Recovery:
System-wide occupancies in North America appear to be pretty steady
and above the prior peak achieved in 2006 following the gradual
improvement in the economy.
With the boost in the economic sector and an improving travel and
tourism industry, hotel companies are well poised for growth in the
second half. North America is still the largest market for Starwood
Hotels & Resorts Worldwide Inc. (
) where it plans to open about one-third of its hotels expecting
2014 to be yet another year of robust growth in the region.
Major hoteliers are exploring growth opportunities abroad,
especially in the emerging markets. These international markets
offer greater potential due to the higher pace of economic growth.
The demand for hotels in these emerging markets is greater than in
the U.S. In fact, Economist Intelligence Unit forecasts that the
Chinese GDP will grow at a rate of 8.0% this year and these high
growth rates are expected to continue at least until 2020. These
positive fundamentals have induced hoteliers to grab a larger share
of the overseas pie.
A number of U.S.-based hoteliers are targeting the unsaturated
markets of Asia-Pacific, Brazil, Russia and Africa. Within Asia,
China promises lucrative growth opportunities with visits expected
to increase substantially in 2014. In fact, China is a major
revenue contributor to both Starwood Hotels and Marriott
International, Inc. (
Apart from China, India is also becoming a hot spot for western
hoteliers with its emergence as a global business hub. Although
economic growth rates are slightly lower than in China, India has
great long-term growth potential as a tourism market. Major players
in the industry are also eying high-potential countries such as
Turkey, United Arab Emirates (UAE) and South Korea which offer well
developed infrastructure. Although most of the Latin American
countries are high-growth markets, Brazil continues to lag other
emerging markets, mainly due to slowdown in tourist arrivals.
Moreover, with the upcoming Summer Olympics in 2016, the Brazilian
government focused on improving the country's infrastructure. The
event will significantly increase tourism in the country, leading
to a proportionate increase in the demand for hotel rooms.
In Europe, too, the scenario is improving. In fact, select markets
in Southern Europe, which were hard hit during the recession, are
witnessing growth. The bullish trend can be validated by Starwood's
system-wide occupancy data for the first quarter, which was an
impressive 57.7% in Europe. Other major players like Hilton
Worldwide, Choice Hotels International Inc. (
) and Wyndham Worldwide Corporation (
) are also eying the European market.
Asset Disposition Strategy:
Since late 2010, the transition to an 'asset light' business model
has gained momentum in the hotels and REIT industry. Asset sale
remains a long-term strategy for greater financial flexibility. The
companies are likely to grow through management and licensing
arrangements instead of direct ownership of real estate. A higher
concentration of management and franchise fees reduces earnings
volatility and provides a more stable growth profile.
Several hoteliers like Marriott International, Hyatt Hotels and
Starwood Hotels followed this industry trend to restructure their
Brand Renovation to Boost Growth:
Hotel companies are diligently working on guest satisfaction to
enhance their position in this highly competitive environment.
Hence, brand conversion and re-modelling have become the order of
the day. In fact, brand perception is likely to have a growing
influence in the large mass-market segment. With the market
becoming increasingly saturated, hotels will need to increasingly
Brands that can offer something uniquely compelling are likely to
grab market share and the ability to innovate will be a key driver
for success. Therefore, many leading hoteliers like Starwood
Hotels, Marriott International, Orient-Express Hotels Ltd. (
), Hyatt Hotels and The Marcus Corporation (
) are firing on all engines to make their brands more relevant in
Embracing Social Media and the Smartphone Technology to Build
Digital innovations and social media are starting to play an
increasingly important role in hotel bookings.
Social media can enhance a brand's prospects by connecting directly
with guests, which in turn can lead to increased loyalty and market
share. Social media sites like Facebook, Inc. (
), Twitter, Inc. (
), TripAdvisor Inc. (
) are now increasingly playing an important role in helping
travelers select a hotel.
Moreover, hoteliers are also increasingly using mobile technology
like applications to help guests manage their bookings, interactive
maps/GPS as well as reward programs. Keeping up with the latest
technology is no longer an option but a necessity for the hotel
industry to be successful.
Many companies are setting up analytics tools to understand
consumer preferences - and deliver a differentiated experience -
which could eventually motivate customers to visit frequently, stay
longer and spend more. Loyalty programs are a major part of the
brand experience and hoteliers are continuously reengineering
loyalty programs aimed at providing a more rewarding experience for
Currently, Marcus Corporation and Marriott Vacations Worldwide
Corp. (VAC) enjoy a Zacks Rank #1 (Strong Buy). However, Starwood,
Wyndham Worldwide, Hilton Worldwide and Choice Hotels hold a Zacks
Rank #2 (Buy).
Despite the Zacks Rank #3 (Hold) tag, we are optimistic on Hyatt
Hotels and Huazhu Hotels Group Ltd (
) based on its optimistic outlook for 2014. Similarly, we are also
positive on Zacks Rank #3 (Hold) company Marriott International and
Intercontinental Hotels Group plc (
) given the momentum in its underlying businesses.
Operating Margins Under Pressure:
Though RevPAR has fairly picked up since the recovery in the
industry in 2009, operating margins are yet to reach the industry
peak of 2007 in the U.S. This is due to the spike in overall
inflation. As a result of economic uncertainty, it is now estimated
that peak levels will not be achieved anytime soon.
Lingering Uncertainty in Other Regions:
Despite immense growth potential, hoteliers are still caught up
with several macroeconomic issues in international markets like the
ongoing austerity measures in Europe resulting from the sovereign
debt crisis and decelerating growth in Asia.
Moreover, a deteriorating political situation and a weak economy
have arrested the overall Latin American sales. The upcoming
elections in Brazil add to the woes. Additionally, the situation in
Argentina has gone from bad to worse as police strikes led to chaos
across several cities in Dec 2013.
The troubles in Egypt and Syria cast a shadow over the performance
of the entire African and Middle Eastern region. Economic headwinds
and political unrest have hampered growth in other parts of the
world as well. Saudi visa restrictions due to the continuing
renovation activity in Mecca also remain an issue.
Uncertainty over the new government's policy in China is also a
concern. The new leadership in China has asked government officials
to put an end to their extravagant ways. Tighter government
spending is expected to affect the food and beverage business of
the hoteliers, particularly in the northern and western parts where
the government is a major customer. Although tourism in India has
recovered post elections, the controversial anti-government
protests in Thailand have significantly hurt business.
Health Care Reforms to Hurt Profitability:
Federal health care legislation mandates employers to provide
health coverage to full-time employees who log in more than 30
hours per week. With this provision going into effect, it would
increase the cost of the leading hoteliers.
There are some names in the space that induce our
cautious-to-bearish outlook. We have no companies carrying a Zacks
Rank #4 (Sell) for now. However, Sands China Ltd. (
) carries a Zacks Rank #5 (Strong Sell), mainly due to China's
economic slowdown, liquidity fears and a crackdown on luxury
Zacks Industry Rank
Within the Zacks Industry classification, we rank all the 260 plus
industries in the 16 Zacks sectors based on the earnings outlook
and fundamental strength of the constituent companies in each
industry. To learn more visit: About Zacks Industry Rank.
As a guideline, the outlook for industries in the top 1/3rd of all
Industry Ranks or a Zacks Industry Rank of #88 and lower is
'Positive'; the middle 1/3rd or industries with Zacks Industry Rank
between #89 and #176 is 'Neutral' and the bottom 1/3rd or Zacks
Industry Rank of #177 and higher is 'Negative.'
The Zacks Industry Rank for the hotels/motels industry is currently
#38. This is lower in all industries ranked, highlighting the
group's near-term positive outlook.
The group's positive Zacks Rank placement is essentially a function
of many a company improving on their top line, primarily due to
increased tourism numbers.
The hotel industry falls under the broader Consumer Discretionary
The second-quarter earnings season so far has shown a mixed trend
in the hotel and motel industry.
While Starwood Hotels beat Zacks earnings expectations, it missed
the same on revenues. On the other hand, Wyndham Worldwide beat the
Consensus mark on both the earnings and revenue front.
The earnings "beat ratio" was 66.7%, while the revenue "beat ratio"
was 55.6% in the second quarter so far. Total earnings for this
sector increased 14.9% in the second quarter so far, compared with
13.7% in the first quarter. Total revenue grew 5.0% in the quarter
versus a 8.8% increase in the previous quarter.
Second quarter 2014 earnings are expected to rise 4.9%, thereby
pegging the full-year 2014 growth outlook at 13.8%. For 2015, the
sector's earnings are poised to expand around 15.5%.
Revenue is expected to grow 4.0% in the second quarter of 2014,
pegging the full-year 2014 growth outlook at 5.3%. For 2015, the
sector's revenues are poised to expand around 5.9%.
For more details about earnings for this sector and others, please
read our '
A look at the
in the table below shows that Hilton and Extended Stay America,
) could miss the Zacks Consensus Estimate in the next quarter,
while Choice Hotels International Inc. could easily surpass.
We firmly believe that despite a lackluster performance by the U.S.
economy in the first quarter, the lodging sector outperformed
expectations. This makes it a worthy investment proposition for
2014 buoyed by the ongoing recovery in the economy as well as the
low supply and high demand scenario in the hotel industry. Although
risks have continued to ease out, near-term risks related to tepid
recovery in the domestic housing sector continue to remain the
Our proprietary Zacks Rank indicates the movement of the stocks
over the short term (1 to 3 months). At present, 35.3% and 58.8% of
the stocks hold a positive and neutral outlook, respectively, while
the remaining 5.9% are negative.
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report
WYNDHAM WORLDWD (WYN): Free Stock Analysis
MARRIOT VAC WW (VAC): Free Stock Analysis
TWITTER INC (TWTR): Free Stock Analysis Report
TRIPADVISOR INC (TRIP): Free Stock Analysis
EXTENDED STAY (STAY): Free Stock Analysis
SANDS CHINA LTD (SCHYY): Get Free Report
MARCUS CORP (MCS): Free Stock Analysis Report
MARRIOTT INTL-A (MAR): Free Stock Analysis
INTERCONTL HTLS (IHG): Free Stock Analysis
CHINA LODGING (HTHT): Free Stock Analysis
STARWOOD HOTELS (HOT): Free Stock Analysis
HILTON WW HLDG (HLT): Free Stock Analysis
HYATT HOTELS CP (H): Free Stock Analysis Report
FACEBOOK INC-A (FB): Free Stock Analysis Report
CHOICE HTL INTL (CHH): Free Stock Analysis
To read this article on Zacks.com click here.