The U.S. hotel & lodging industry saw a solid start to 2013,
with lodging performance indicators going up in most parts of the
world. With concerns still lingering over a number of macro issues
that could still leave the sector in disarray, we have now come
halfway through 2013 and would like to take a close look at how
things are shaping up.
In the second quarter, two of the sector heavyweights --
Starwood Hotels and Resorts Worldwide Inc.
Wyndham Worldwide Corp.
) -- surpassed their respective Zacks Consensus Estimates on
earnings. While Wyndham managed to beat on revenues, Starwood
missed. Both have raised earnings guidance for the full year.
Notwithstanding the common macroeconomic hurdles expected ahead,
the lodging sector would continue its recovery trail this year
thanks to 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 more than
the past couple of years.
Other 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 giving every effort to
improve their primary performance metrics like occupancy and RevPAR
(revenue per available room).
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 a consequent growth in the sector.
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
#65. This is in the top 1/3rd of all industries ranked,
highlighting the group's near-term Positive outlook. The group's
favorable Zacks Rank placement is essentially a function of many
companies' improving their earnings picture which prompted analysts
to raise their estimates. Notably, this group of 13 companies
benefited from 31% positive revisions to annual earnings estimates.
Demand Exceeds Supply:
Owing to gradual economic recovery, the hotel industry continues to
see upside. Starwood has estimated high-end travel spending to have
grown nearly 40% over the last four years, almost double as fast as
global GPD. The supply situation remains tight both in the U.S. and
Europe . 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
For 2014, PKF Hospitality Research predicts RevPAR to increase 7.7%
buoyed by a 3.3% rise in demand and an occupancy level of 63.8%. As
per the research firm, this is going to be the highest annual
occupancy level since 1997.
), fewer supplies combined with nearly peak occupancy levels will
help hoteliers charge higher for the rooms in 2013. In a nutshell,
with lower supply, RevPAR is improving on strong demand and
continued higher pricing.
Improving Trends in North America & Europe:
System-wide occupancies in North America appear steady. Starwood
expects 2013 to be its strongest year since the recession in terms
of hotel openings in North America. As per Smith Travel Research,
the U.S. lodging sector has now seen RevPAR growth for 13 straight
In Europe, too, the scenario is improving. Consumer confidence in
the Eurozone was recorded close to a two-year high for the month of
July. In fact, select markets in Southern Europe which was hard hit
during recession began to report growth. The bullish trend on two
continents can be validated by Starwood's occupancy data in the
second quarter which surpassed 76% in the U.S. and 72% in Europe.
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 treaded 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 on their stepped-up pace of economic
A number of U.S.-based hoteliers are targeting the unsaturated
markets of India, Brazil, China, Russia and Africa. 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 western hoteliers
as the country is emerging as a global business hub. The prospect
for Latin America, particularly Mexico, remains outstanding. Lower
crime rates in the country have ensured that U.S. groups are once
again taking an interest in Mexico. Further, major events like the
FIFA World Cup in 2014 and the Summer Olympics in 2016 in Brazil is
also boosting the country's infrastructure as demand for hotel
rooms will grow and the events will significantly increase tourism
in the country.
Shift Toward Asset-Light Model:
Since late 2010, transitioning 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,
which help 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.
Following the industry trend, many industry players like
Morgans Hotel Group Co.
Red Lion Hotels Corp.
) and Starwood have taken resorts to an asset disposition strategy.
Global Economic Backdrop Yet to Fully Recover:
Despite the strengths, the companies are still caught up with
macroeconomic tensions like the probability of tapering
quantitative easing by the Fed, ongoing austerity measures in
Europe owing to the sovereign debt crisis and decelerating growth
The budget sequestration, effective since Mar 1, 2013, to fight
issues like high unemployment and tighter credit availability might
hamper business travel in North America to some extent. Government
is likely to cut its group and transient bookings. Therefore,
declining government business is expected to affect the company's
RevPAR for the rest of 2013.
We believe the European tourism industry will likely remain
challenged until the continent tides over its nagging economic
difficulties. Most data from the region still shows continued
problems, even though the broader picture has materially
Growth has also slowed in a number of major emerging economies,
especially in Brazil, China and India. A weaker external
environment, a sharp deceleration in domestic demand and a fragile
export environment could possibly hurt the performance of the
lodging sector in the near term.
The shadow banking system in China has created trouble and India
raised concerns due to its recent economic weakness. Brazil is
feeling the dual pressures of slower growth and heightened
inflation. Apart from slower GDP growth, RevPAR in 2013 might
slowdown on account of higher supply growth in a few emerging
Operating Margins Under Pressure:
Though RevPAR has fairly picked up since the recovery in the
industry, operating margins are yet to reach the industry peak 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.
Hotel industry falls under the broader Consumer Discretionary
sector, which portrays stable earnings trends. The second quarter
2013 results for the sector have been impressive in terms of both
beat ratios (percentage of companies coming out with positive
surprises) and growth.
The earnings "beat ratio" was 72.7%, while the revenue "beat ratio"
was 45.5%. However, most earnings results from this sector have yet
to be released with just 35.5% reported as of July 25. Total
earnings for this sector are expected to go up 11.6% in the second
quarter, modestly down from the 14.0% growth in the first quarter
of 2013. The lag in sequential earnings growth came from margin
On the revenue front, the sector has been witnessing a remarkable
recovery. Expectation for total revenue expanded 5.9% in the
quarter on the top of a 4.6% increase in the prior quarter.
Looking at the consensus earnings expectations for the rest of the
year, we are encouraged since earnings are expected to grow 5.4% in
the third quarter of 2013 and 16.2% in the fourth quarter, thereby
registering full-year 2013 growth of 12.9%. For the next year, the
sector is poised to expand around 15.9% with 13.8% growth in the
first quarter itself.
For more details about earnings for this sector and others, please
read our '
Moving Into the Third Quarter
Hoteliers will be facing tough comparison in Europe as the biggest
event of 2012 -- the Summer Olympics -- brought in extra business
in the comparable period of last year. In the Gulf, Saudi visa
restrictions are harshly reducing Ramadan-related travel. Turmoil
is also creeping up in the apparently improving Egypt. The recent
protests in Turkey will also likely mar the country's lodging
business in the third quarter. However, according to Starwood, all
these threats should subside by the fourth quarter.
On the positive front, Argentina which had been adversely affecting
Latin American RevPAR for the last nine months mainly due to a
negative currency impact will likely represent an easy comparison
in the third quarter. Markets of Canada and Australia which boast
ample of resources should bode well for the big hoteliers'
In hindsight, the performance of the hotel sector was essentially
satisfactory. Our proprietary Zacks Ranks indicate the movement of
the stocks over the short term (1 to 3 months). At present,
respectively 46% and 24% stocks sport a positive and neutral
Stocks which will likely outperform the broader market and
currently hold a favorable Zacks Rank include
Home Inns & Hotels Management Inc.
The Marcus Corporation
Orient-Express Hotels Ltd.
). We currently refrain from getting too enthusiastic on the three
stocks in our universe that continue to hold a Zacks #3 Rank
(Hold). These stocks are Intercontinental, Starwood and Red Lion.
However, there are two bellwethers --
Marriott International Inc.
) -- that currently carry Zacks Rank #4 (Sell).
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
RED LION HOTELS (RLH): Free Stock Analysis
MARRIOT VAC WW (VAC): Free Stock Analysis
WYNDHAM WORLDWD (WYN): Free Stock Analysis
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