The U.S. hotel & lodging industry wrapped up the year 2013
on a mixed note as the economy struggled to gradually get back to
health. The year was led by strong demand from business as well as
leisure travelers which, along with limited supply, gave hoteliers
strong pricing power throughout the year.
In fact, important factors like higher barriers to entry and lower
reliance on third-party wholesalers have positioned the hoteliers
to attain peak levels not seen since the onset of the global
economic crisis in 2007. The hoteliers are making every effort to
improve their primary performance metrics like occupancy and
revenue per available room (RevPAR).
However, higher cost and expenses incurred for continued
renovation and other initiatives taken by leading hoteliers to
improve traffic have dampened the bottom line. Moreover, economic
and political uncertainty in most parts of the world remained as
In spite of these headwinds, the lodging performance indicators
showed year-over-year improvements. 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
2013 was up 3.9% year over year. Overall occupancy was up
1.5% 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,
average daily rate as well as RevPar for the first and second weeks
of March, if it is any clue, speaks well for 2014 on the whole.
Statistics bear out this relatively favorable environment. A recent
report by Price Waterhouse Coopers 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 6.0% in 2014, driven by
increased ADR of 4.5% which is better than 3.9% in 2013.
As per Price Waterhouse Coopers, 2014 will be the fifth consecutive
year of positive RevPAR growth. Price Waterhouse Coopers also added
that high-priced segments will be the major driver of industry
Furthermore, mega sporting events in South America scheduled in
2014 through 2016 is 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.
Demand Exceeds Supply:
A gradual recovery in the broader economy has boosted the hotel
industry as demand picks up for both leisure and transient business
travel. With limited supply and strong demand, the room rates are
seeing a northward movement.
Smith Travel Research expects the sector's demand growth to be 2.4%
in 2014 in the U.S. with only a 0.1% increase in supply.
Hyatt Hotels Corporation
Hilton Worldwide Holdings Inc.
), the supply-demand environment in the business is favorable with
healthy demand growth outpacing levels of supply growth that are
still well below long-term averages. This would lead to incremental
rate increases, thereby driving RevPar higher.
The North American Recovery:
System-wide occupancies in North America appear to be pretty steady
and above the prior peak level 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. North
America is still the largest market for
Starwood Hotels & Resorts Worldwide Inc.
). In 2014, the company expects another year of robust growth in
North America and plans to open about one-third of its new hotels
in the region.
Owing to the saturation in the U.S market, major hoteliers are
exploring growth opportunities abroad. Some international markets
offer greater potential based on the higher pace of economic
growth. The demand for hotels in the international market is
greater than in the U.S. and the pace of recovery is particularly
faster. The positive fundamentals in foreign markets have spurred
hoteliers to grab a larger piece 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. China is in fact a major
contributor to both Starwood Hotels and
Marriott International, Inc.
Apart from China, India is now becoming a hot spot for western
hoteliers, as the country is emerging as a global business hub.
Major players in the industry are also eyeing the Latin American
countries, particularly Brazil and Mexico. Brazil primarily
attracts affluent domestic tourists in the flush of an economic
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. The events will
significantly increase tourism in the country and the demand for
hotel rooms will shoot up.
In Europe, too, the scenario is improving. In fact, select markets
in Southern Europe, which were hard hit during the recession, have
begun to report growth. The bullish trend can be validated by
Starwood's system-wide occupancy data in the fourth quarter, which
was an impressive 68.0% in Europe. Other major players like Hilton
Choice Hotels International Inc.
Wyndham Worldwide Corporation
) are also eyeing 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 rebalance their
Renovation to Boost Growth:
Hotel companies are diligently working on guest satisfaction to
enhance their position in a cut-throat environment. Hence, brand
conversion and remodeling has become the in thing for major
hoteliers. Many leading hoteliers like Starwood Hotels, Marriott
Orient-Express Hotels Ltd.
), Hyatt Hotels and
The Marcus Corporation
) 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.
Currently, we have Marcus Corporation as a Zacks Rank #1 (Strong
Buy) stock. However,
Sands China Ltd.
) and Marriott International 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 strong fourth quarter results and an optimistic
outlook for 2014. Similarly, we are also positive on Zacks Ranked
#3 (Hold) company Starwood Hotels given the momentum in its
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.
Lingering Uncertainty in Other Regions:
Despite its immense growth potential, the hoteliers are still
caught up with several macroeconomic issues like the probability of
further tapering by the Fed, ongoing austerity measures in Europe
resulting from the sovereign debt crisis and decelerating growth in
Moreover, a deteriorating political situation and a weak economy
have put the brakes on overall Latin American sales. The
upcoming elections in Brazil make the situation much more
unpredictable. 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 company, particularly in the north and west where the
government is a major customer. The situation in India remains
uncertain with elections coming up while the controversial
anti-government protests in Thailand have significantly hurt
business in this crucial market for hoteliers.
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. These include
Home Inns & Hotels Management Inc.
Intercontinental Hotels Group plc
), Choice Hotels International, and Orient-Express Hotels, each
carrying a Zacks Rank #4 (Sell). We have no companies carrying a
Zacks Rank #5 (Strong Sell) for now.
Intrawest Resorts Holdings, Inc.
Marriott Vacations Worldwide Corp.
), Hilton Worldwide and Wyndham Worldwide all hold a Zacks Rank #3
(Hold) on the back of sluggish results in the last reported
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
#104. This is in the middle 1/3rd of all industries ranked,
highlighting the group's near-term neutral outlook. The group's
neutral Zacks Rank placement is essentially a function of many a
company improving on their top line but floundering on their bottom
line due to higher expenses.
The hotel industry falls under the broader Consumer Discretionary
sector. The fourth quarter of 2013 results for the sector has been
decent in terms of both beat ratios (percentage of companies coming
out with positive surprises) and growth.
The earnings "beat ratio" was 50.0%, while the revenue "beat ratio"
was 53.1%. Total earnings for this sector increased 12.0% in the
fourth quarter, compared with 12.1% in the third quarter. Total
revenue grew 3.3% in the quarter versus a 3.2% increase in the
First quarter 2014 earnings are expected to rise 5.4%, thereby
pegging the full-year 2014 growth outlook at 12.5%. For 2015, the
sector's earnings are poised to expand around 15.7%.
Revenue is expected to grow 3.7% in the first quarter of 2014,
pegging the full-year 2014 growth outlook at 4.5%. For 2015, the
sector is poised to expand around 4.4% with 6.2% growth in full
For more details about earnings for this sector and others, please
The fourth-quarter earnings season 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 missed
the Consensus mark on the earnings front while surpassing revenue
estimates. Marriott International missed the Zacks Consensus
Estimate squarely on both earnings and revenues while Hyatt Hotels
easily surpassed on both lines.
A look at the
in the table below shows that
Extended Stay America, Inc.
), Hyatt Hotels, Marcus Corp. and Marriott International could miss
the Zacks Consensus Estimate in the next quarter (first quarter
2014) while Wyndham Worldwide could easily surpass the same.
We firmly believe that despite a few stumbles, the lodging sector
offers a worthy investment proposition for 2014 given the ongoing
recovery in the economy as well as the low supply scenario in the
Our proprietary Zacks Rank indicates the movement of the stocks
over the short term (1 to 3 months). At present, 20.0% and 53.3% of
the stocks hold a positive and neutral outlook, respectively, while
the remaining 26.7% are negative.
CHOICE HTL INTL (CHH): Free Stock Analysis
HYATT HOTELS CP (H): Free Stock Analysis Report
HILTON WW HLDG (HLT): Free Stock Analysis
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
MARCUS CORP (MCS): Free Stock Analysis Report
ORIENT EXP HOTL (OEH): Free Stock Analysis
SANDS CHINA LTD (SCHYY): Get Free Report
INTRAWEST RESRT (SNOW): Free Stock Analysis
EXTENDED STAY (STAY): Free Stock Analysis
MARRIOT VAC WW (VAC): Free Stock Analysis
WYNDHAM WORLDWD (WYN): Free Stock Analysis
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