The year 2013 is expected to end on a positive note for the
hotel & lodging industry based on growing global travel demand
and improving lodging performance indicators in most parts of the
world. The recent run in the sector was largely supported by
better-than-expected improvement in the job market in Oct 2013.
Though the partial U.S. government shutdown in early October had
been a dampener, the lodging sector should continue its recovery
into next year, underpinned by rising consumer confidence, growing
U.S. business and strong international travel and tourism volumes.
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 making every effort to
improve their primary performance metrics like occupancy and RevPAR
(revenue per available room).
A recent report by Price Waterhouse Coopers shows that the fiscal
cliff notwithstanding, 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 5.5% in 2013 and 5.9% in 2014, driven by increased
occupancy rate and higher average daily rate (ADR). 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 growth.
Furthermore, mega sporting events in South America scheduled in
2014 through 2016 will boost tourism. As owners and operators
strive to enhance value and competitiveness, industry-best
practices, like sustainability and brand refreshment, will remain
How Well Did Leading Hoteliers Do in Q3?
The third quarter of 2013 was quite strong for most of the sector
Starwood Hotels and Resorts Worldwide Inc.
Marriott International, Inc.
Wyndham Worldwide Corp.
Home Inns & Hotels Management Inc.
). All these hoteliers surpassed their respective Zacks Consensus
Estimate for both earnings and revenue.
Most of these hoteliers have witnessed significant growth in both
RevPAR and ADR during the quarter. Moreover, Wyndham and Starwood
have both raised their earnings guidance for the full year on the
back of strong third-quarter performance.
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
#15. This is in the top 1/3rd of all industries ranked,
highlighting the group's near-term bullish outlook. The group's
favorable Zacks Rank placement is essentially a function of many a
company improving its earnings picture, eliciting a positive
estimate revision trend by the Street.
Demand Exceeds Supply:
A gradual recovery in the broader economy has boosted the hotel
industry as demand rises both for leisure as well as transient
business travel. With limited supply, the room rates are going up
backed by strong demand.
Smith Travel Research (STR), the leading information and data
provider for the lodging industry, expects the sector's demand
growth to be 2.2% in 2013 in the U.S. with only a 0.8% increase in
supply. As per STR, supply growth is expected to be 1.1% in 2014,
lower than the long-term average of 1.7%.
According to Marriott, low supply combined with nearly peak
occupancy levels will help hoteliers charge higher for rooms in
2013. In a nutshell, with lower supply and robust demand, RevPAR is
going up steadily backed by higher pricing.
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.
According to STR, the U.S. hotel industry will continue to perform
well in late 2013 and in 2014 across all three key performance
measures -- occupancy level, ADR and RevPAR. STR expects that with
a 4.2% and 4.6% rise in ADR, RevPAR would grow 5.7% and 6.0% in the
U.S. in 2013 and 2014, respectively.
STR also predicts upper-tier lodging segments are expected to
witness maximum RevPAR growth in 2013. The U.S. hospitality sector,
specifically in Houston, Oahu Island and San Francisco, continues
to display strong signs of expansion and growth.
The bullish forecast seems to have pumped fresh blood into the
hospitality sector. Hotel owners are investing huge money and
driving innovations in the hope of a brighter future. Marriott
expects nearly 50% of its 2013 openings will be in the U.S. as a
positive business environment prevails in North America.
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 on two continents can be
validated by Starwood's system-wide occupancy data in the third
quarter, which surpassed 76% in the U.S. and 73.9% in Europe.
The demand for hotels in the international market is greater than
in the U.S. and the pace of recovery is particularly fast in those
regions. The positive fundamentals in foreign markets have spurred
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 immense growth potential with visits expected to
increase substantially by 2014. Both Starwood and Marriott generate
their second largest revenue stream from China.
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.
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
Morgans Hotel Group Co.
Red Lion Hotels Corp.
), Marriott and Starwood followed this industry trend to rebalance
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 of the industry's biggest companies, like Starwood,
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 in the coming year.
Lingering Uncertainty in Many Quarters:
Despite immense growth potential, the hoteliers are still caught up
with several macroeconomic issues like the probability of tapering
quantitative easing by the Fed, ongoing austerity measures in
Europe resulting from the sovereign debt crisis and decelerating
growth in Asia.
Budget sequestration, effective since Mar 1, 2013, is expected to
hamper the business travel in North America to some extent. Lower
government spending on travel will hurt the group and transient
We believe the European tourism industry will continue to face
challenges until it recovers from its nagging economic
difficulties. Even though the broader picture has materially
stabilized, most data from the region still shows continued
Growth has slowed down in a number of major emerging economies,
especially in Brazil, China and India. We expect some slowdown in
China due to the new government policies. Brazil is also
experiencing the dual pressures of a deteriorating political
situation and a slowing economy.
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 return before 2014 or 2015.
The hotel industry falls under the broader Consumer Discretionary
sector, which displays stable earnings trends. The third quarter of
2013 results for the sector has been impressive in terms of both
beat ratios (percentage of companies coming out with positive
surprises) and growth.
The earnings "beat ratio" was 79.3%, while the revenue "beat ratio"
was 31.0%. Total earnings for this sector increased 11.9% in the
third quarter, reflecting a decline from 15.8% growth registered in
the second quarter. Total revenue grew 4.6% in the quarter versus a
6.8% jump in the previous quarter.
We are also encouraged by the positive trend seen in the earnings
consensus, with fourth quarter 2013 earnings expected to rise 9.7%,
thereby pegging the full-year 2013 growth outlook at 15.3%. For
2014, the sector's earnings are poised to expand around 15.3% with
7.0% growth in the first quarter itself.
Moving Into the Fourth Quarter
Coming to near-term industry dynamics, hoteliers will likely report
modest RevPAR growth in the fourth quarter of 2013 backed by an
improvement in room rates and strong demand, offset by economic
Marriott expects the government shutdown to hurt the North American
RevPAR by 1% in the fourth quarter.
Overall, the performance of the hotel and lodging sector was
essentially satisfactory. Our proprietary Zacks Ranks indicate the
movement of the stocks over the short term (1 to 3 months). At
present, 41.7% and 58.3% stocks, respectively, hold a positive and
neutral outlook. None of the hotel and lodging stocks currently
carry a negative rating.
We recommend few stocks in the sector at this point, as these
companies are showing significant growth despite the secular
headwinds. The stocks in our coverage with a Zacks Rank #1 (Strong
Buy) include Home Inns & Hotels Management Inc. and Sands China
Additionally, we prefer stocks with a Zacks Rank #2 (Buy), namely
Marriott Vacations Worldwide Corp.
Orient-Express Hotels Ltd.
HOME INNS&HOTEL (HMIN): Free Stock Analysis
STARWOOD HOTELS (HOT): 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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