The U.S. hotel & lodging industry wrapped up the year 2012
on a positive note, with lodging performance indicators witnessing
considerable improvement in most parts of the world. In the fourth
quarter, these sector heavyweights surpassed our earnings
Starwood Hotels and Resorts Worldwide Inc.
Marriott International Inc.
Wyndham Worldwide Corp.
Choice Hotels International
Hyatt Hotels Corp.
Notwithstanding the common macroeconomic hurdles expected ahead,
the lodging sector should continue its recovery this year,
underpinned by improving U.S. business as well as strong
international travel and tourism volumes. The number of hotels
Starwood opened and new deals signed in North America in 2012 were
much higher the past couple of years.
Coming to the near-term industry dynamics, hoteliers will likely
report significant RevPAR (revenue per available room) growth in
the first quarter mainly on improved room rates which will be
powered by stronger group business.
Market researcher Price Waterhouse Coopers expects RevPAR growth of
5.9% in 2013, representing the fourth year of lodging recovery.
According to the market researcher, hotels across the gamut of
price tiers, in particular the higher-priced ones, are expected to
drive this recovery and consequent growth in the sector.
Improving Trends in North America:
Owing to gradual economic recovery, the hotel industry continues to
witness an upside. With lower supply in the U.S., RevPAR is
improving on strong demand and continued higher pricing.
System-wide occupancies in North America appear steady and above
the prior peak level in 2006.
On a positive note, Canada also improved sequentially in the fourth
quarter of 2012, and hoteliers expect to witness RevPAR growth from
their Canadian businesses in 2013. Starwood expects 2013 to be its
strongest year since the recession, in terms of hotel openings in
The U.S. government has also implemented a new National Travel and
Tourism Strategy, the main objective of which is to attract more
than 100 million international visitors by 2021. The government
believes that this will provide a significant growth stimulus for
the local economy. The strategy, if successful, will reap profits
for the U.S. hoteliers.
For 2013, Smith Travel Research predicts occupancy to be virtually
flat with a 0.3% increase to 61.4%, ADR to rise 4.6% to $111.01 and
RevPAR to grow 4.9% to $68.17.
Demand Exceeds Supply:
Room rates are on the rise in an environment marked by higher
demand and lower supply. PWC forecasts 0.8% supply growth and
around 1.8% demand growth in 2013. This scenario is anticipated to
push up occupancy levels. Supply growth is expected to remain low
for a few years to come.
According to Marriott, fewer supplies combined with nearly peak
occupancy levels will help hoteliers charge higher for rooms in
2013. Smith Travel Research anticipates room rates to reach 2008
levels on a nominal basis, going forward.
Shift Toward Asset-Light Model:
Since late 2010, transition to an "asset light" business model has
gained prominence in hotels and REIT industries. Asset sales remain
a long-term strategy to strengthen financial flexibility, helping
companies 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.
Hence, hoteliers are focused on rebalancing their portfolios by
increasing contributions from managed and franchised hotels. This
fee-based business is attractive as growth is powered by multiple
sources like RevPAR, unit additions and incentive fee escalation.
The business is also capital efficient as owner/developer partners
provide the capital and the company earns a fee by
managing/franchising the property.
Following the industry trend, many industry players like
Morgans Hotel Group Co.
Red Lion Hotels Corporation
) and Starwood have moved toward an asset disposition strategy.
Renovation Gaining Precedence:
Lately, most of the hoteliers are increasingly investing on
property renovations. Hotel companies are diligently working on
guest satisfaction to enhance their position in a cut-throat
environment. Brand conversion and remodeling have become industry
trends. Many industry biggies like Starwood, Marriott and
InterContinental Hotels Group
) have tread the same path.
There are several well-positioned, older hotels in metro markets
which are good candidates for restructuring. In view of that, we
foresee several renovations this year.
Owing to saturation in the U.S. market, major hoteliers are
exploring growth opportunities abroad. Some international markets
offer greater potential riding on a stepped-up pace of economic
growth. The operating environments in these markets help hoteliers
grab a bigger share of the overseas pie.
A number of U.S.-based hoteliers are targeting the unsaturated
markets of India, Brazil, China, Russia and Africa. Major players
in the industry like Starwood and Marriott are primarily eyeing the
Asia-Pacific, Africa and Latin American regions.
China is set to fuel a recovery in global tourism, and is expected
to emerge as the world's most popular travel destination by 2020.
Both Starwood and Marriott generate their second largest revenue
stream from China.
Apart from China, India is another hot spot for the western
hoteliers. India possesses a compelling investment proposition and
is growing in prominence as a global business hub, where the demand
for moderate-tier as well as upscale branded hotels is expected to
considerably outpace the supply over the next three to four years.
The prospects for Latin America, particularly Brazil, remain
outstanding. Brazil is the fastest-growing travel and tourism
economy in Latin America. For tourists, particularly domestic
travelers, the region is becoming one of the hottest destinations.
Brazil primarily attracts affluent domestic tourists.
Moreover, with major events like the FIFA World Cup in 2014 and the
Summer Olympics in 2016, the Brazilian government has turned its
focus on improving the country's infrastructure as demand for hotel
rooms will shoot up and the events will significantly increase
tourism in the country.
However, not everything is rosy in Latin America; Argentina has
been adversely affecting Latin American RevPAR for the last nine
months. The situation is not likely to improve in the near future
with economic and political tension, an adverse currency impact and
strict government control on imports.
Tension in the Eurozone:
The European tourism industry will remain challenged until the
continent tides over its nagging economic difficulties. According
to Smith Travel Research, Europe showed no such movement during
2012, with occupancy inching up 0.1%, ADR and RevPAR declining 4.0%
each (in USD). Russia and Germany were better-performing markets in
the region. Though the scenario is improving, not much progress is
expected in 2013.
A soft booking trend in the region is expected as most of the
European businesses of U.S. hoteliers are driven by the leisure
segments located specifically in Spain, Italy and Greece. These
European countries are significantly exposed to sovereign debt
challenges. However, the economic crisis is not uniform across the
In addition, in 2013, hoteliers will be facing tough comparison in
Europe as some major events of 2012 like the Olympics, the Euro Cup
Championship, and a grand fair in Germany brought in extra business
Slowdown in Emerging Markets:
As per IMF, the emerging markets have started to witness a slowdown
owing to weaker external environment, a sharp deceleration in
domestic demand and policy tightening as well as a fragile export
environment which could possibly hurt the performance of the
lodging sector in the near term.
Growth has slowed in a number of major emerging economies,
especially in Brazil, China and India. Apart from slower GDP
growth, RevPAR in 2013 may slow down on account of higher supply
growth in a few emerging markets.
Operating Margins Under Pressure:
Though RevPAR has fairly picked up since the recovery in the
industry in 2009, operating margins have 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.
Some hoteliers like Marriott even feel that the golden days of the
lodging industry will not be back before 2014 or 2015. Also, any
sudden deterioration in the European debt crisis and a rise in gas
prices could undermine the winning momentum in hotel industry. If
the economic recovery is actually thwarted, growth in the hotel
sector -- one of the key indicators of measuring discretionary
spending of consumers -- will be the worst hit.
The earnings results of most of the hotels like Starwood, Wyndham,
Marriott, Choice Hotels,
Hyatt Hotels and Home Inns & Hotels Management
) surpassed the Zacks Consensus Estimates. The highest positive
surprise of 333.23% came from China-based Home Inns followed by
81.82% from U.S.-based Hyatt. The lowest surprise of 1.82% came
On the other hand, results from
Orient-Express Hotels Ltd.
) and Morgans were lower than the Zacks Consensus Estimates with a
negative surprise of 266.67% from Orient followed by a 118.18%
negative surprise from Morgans.
Our proprietary Zacks Ranks indicate the movement of the stocks
over the short term (1 to 3 months). By the look of things, we
currently refrain from getting too enthusiastic on a number of
stocks in our universe that continue to hold a Zacks #3 Rank
(Hold). These include Starwood, Marriott, Wyndham, Hyatt, Morgan
Hotels, Orient-Express and
The Marcus Corporation
However, there are some lodging industry stocks which will likely
outperform the broader market and currently hold a favorable Zacks
Rank. These include Home Inns and Choice Hotels. While Home Inns
retains a Zacks Rank #1 (Strong Buy), Choice Hotels holds Zacks
Ranked #2 (Buy).
In hindsight, the fourth quarter earnings results of the hotel
sector were essentially satisfactory. Hence, we have a Hold rating
for the majority of stocks in our coverage in this sector. There
were no stocks with the Zacks Rank #4 (Sell) or #5 (Strong Sell).
To sum up, we firmly believe that despite a few pitfalls, the
lodging sector offers a worthy investment proposition for 2013
given the ongoing recovery in the economy as well as the low supply
scenario in the hotel industry.
CHOICE HTL INTL (CHH): Free Stock Analysis
HYATT HOTELS CP (H): Free Stock Analysis Report
HOME INNS&HOTEL (HMIN): Free Stock Analysis
STARWOOD HOTELS (HOT): Free Stock Analysis
CHINA LODGING (HTHT): Free Stock Analysis
INTERCONTL HTLS (IHG): Free Stock Analysis
MARRIOTT INTL-A (MAR): Free Stock Analysis
ORIENT EXP HOTL (OEH): Free Stock Analysis
MARRIOT VAC WW (VAC): Free Stock Analysis
WYNDHAM WORLDWD (WYN): Free Stock Analysis
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