Despite the prevailing challenges such as unfavorable governmental policies, uncertainty in specific markets and RevPAR pressure, economic fundamentals appear strong enough to support modest growth in the hotel space in the short-to-medium term, and without any additional stimulus.
GDP grew at a seasonally adjusted annual rate of 2.6% in the fourth quarter of 2017, following gains of more than 3% in the previous two quarters, per the "advance" estimate released by the Bureau of Economic Analysis. This marked the economy's strongest stretch of growth since the expansion started in mid-2009.
Consumer spending grew 3.8% in the fourth quarter after a 2.2% gain in the third. The trend is expected to continue through 2018, raising optimism for companies in the leisure and recreation space.
Again, there was a marked improvement in the Consumer Confidence Index in January, after a setback in December. Consumer Confidence rose 2.3 points to 125.4 in January. The momentum is expected to continue through 2018. Confident consumers bode well for hotels in spite of the surge in new inventory.
Thus, we see no reason why the U.S. hotel industry should not continue to enjoy gains on both the top and the bottom line.
In fact, there are a number of reasons why the broader hotel space should continue doing well over both short and medium terms.
A Favorable Demand-Supply Gap
A strong economy, higher income and stepped-up consumer confidence has raised demand for both leisure and business travel. The supply-demand environment in the United States has been favorable since 2010, with growth in demand outpacing supply growth. Though, of late, the gap between demand and supply growth has narrowed considerably and occupancy growth has slowed, higher average daily rates (ADRs) are expected to keep driving revenue per available room (RevPAR).
Given the positive economic outlook for the remainder of the year, which could result in the ninth successive year of occupancy growth for the U.S. lodging industry, PricewaterhouseCoopers (PwC) is projecting demand (2.1% rise) to outpace supply (increase of 1.9%) in 2018.
Attempts to Differentiate
With the market becoming increasingly saturated, especially in the luxury space, hotels are firing on all cylinders to differentiate themselves. According to players in the hospitality sector, eco-awareness, wellness and brand distinctiveness are important themes that customers are currently looking for.
Moreover, U.S. hospitality companies are increasingly targeting millennials, who form a significant part of the population. Millennials are generally more concerned about health, convenience, service and ethical sourcing of food.
This is probably the reason why big hotel brands are launching more lifestyle hotels, which are mainly boutique brands benefiting from the parent companies' infrastructure. These include brands like Marriott International 's (MAR) Element, Aloft and Edition; InterContinental Hotels Group 's (IHG) Hotel Indigo and Andaz by Hyatt Hotels Corp. (H).
Efforts to Expand Globally
Major hoteliers are exploring growth opportunities abroad, especially in relatively untapped emerging markets and the outlying areas surrounding major cities.
A number of U.S.-based hoteliers are targeting the unsaturated markets in Asia-Pacific, the Middle East, Brazil, Russia and Africa. Within Asia, China promises significant growth, despite an economic slowdown, with visits expected to increase substantially ahead. Notably, China is the largest source market for outbound travel now. In fact, Chinese outbound travel, according to Chinese authorities in the sector, is set to boom further with 700 million trips projected over the next five years.
Interestingly, the country is a major revenue contributor for Marriott, where it entered into a joint venture with Alibaba with an aim to improve market share, expand membership of its loyalty programs and reduce distribution costs. India is also becoming a hot spot for U.S.-based hoteliers with its emergence as a global business hub. Although economic growth rates are slightly lower than China, the country has great long-term growth potential as a tourism market.
In fact, Hyatt's major target markets include India and China. Apart from these, the company has also announced further expansion plans into diverse international markets including Australia, Brazil, Germany, United Kingdom, Indonesia, Japan, Mexico, Saudi Arabia, Singapore, Thailand and the Netherlands, among others.
Meanwhile, Europe remains an attractive market for hoteliers despite repeated terror attacks and Brexit-induced uncertainties. Major players like Marriott, Hilton Worldwide (HLT), Choice Hotels (CHH) and Wyndham Worldwide (WYN) have a strong foothold in this region.
Many of the hoteliers are also looking to leverage from Latin America's upsurge in accommodation demand. In this respect, Wyndham Hotel Group acquired Latin America's leading Fen Hotels. Meanwhile, with an increasing number of managed and franchised limited service hotels in Mexico, Colombia and Brazil, Marriott expects its distribution in the Caribbean and Latin American region to increase 75% by 2018.
Increasing Loyalty Programs
Loyalty programs have become one of the best ways to counter the tough operating environment and enhance guest experience and raise occupancy. Given the fact that rewards' members stay longer than nonmembers and generate more revenues for their franchisees, hoteliers have been increasingly focusing on their loyalty programs.
Notably, with about 52 million members, Wyndham Rewards offers one of the most generous reward program payouts in the industry. In fact, as per a recent study conducted by Ideaworks Company, Wyndham Rewards is touted to be the most-rewarding loyalty program in the U.S. hotel industry with an average return of 16.7% in value on every dollar spent on a room booking. Notably, the company expects Wyndham Rewards to generate nearly a third of the incremental tours needed to hit its new owner growth target of 23%.
Meanwhile, post-acquisition of Starwood, Marriott has linked industry-leading guest loyalty programs - Marriott Rewards, Ritz-Carlton Rewards and Starwood Preferred Guest - and announced the matching of member status between the programs, thereby leading to an even larger loyalty community. Loyalty programs are Marriott's most powerful marketing platform, and it continues to invest in marketing partnerships and innovations designed to provide a more rewarding experience to guests.
In first-quarter 2017, Hyatt launched a new loyalty program, World of Hyatt, which replaced its Gold Passport loyalty program. The company expects the program to build even higher levels of guest preference and help in sustaining market share gains.
Notably, Hilton has created one of the largest loyalty programs, Hilton Honors. With more than 63 million members, this network has created an extremely valuable asset for the company. In fact, about 57% of all occupancy per night takes place through this member program. Choice Hotels' loyalty program, Choice Privileges, is rapidly expanding and continues to drive guests to its franchisees' hotels.
The program recently surpassed 32 million members and has already added more than 2.5 million new members so far this year. Loyalty programs are thus the key to better brand experience and hoteliers are continuously reengineering these to provide a more fulfilling experience.
Digital innovation and social media have started to play a key role in hotels' increased push to retain customers. Social media sites like Facebook, Inc. (FB), Twitter, Inc. ( TWTR ) and TripAdvisor Inc. (TRIP) are commonly used by travelers to select hotels and in this way they are enhance a brand's prospects by connecting directly with guests.
Moreover, hoteliers are using apps to help guests manage bookings and offering interactive maps/GPS to increase occupancy and offer a faster and seamless experience. They are investing in mobile check-in, fast Wi-Fi, and digital room keys to enhance guest experience.
In fact, mobile check-ins and check-outs have increased substantially over the past few years and so has the enthusiasm for chat-based messaging apps, like chatbots, among potential hotel customers. Being tech savvy is thus no longer an option but a necessity to survive in the intensely competitive hotel industry. Thus, the majority of hoteliers are investing in mobile check-in, fast Wi-Fi, and digital room keys to enhance guest experience.
Many hoteliers are also 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.
Top-ranked stocks in the hotel space include Intercontinental Hotels Group, Hilton and Marriott, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
Hilton's earnings for 2018 are projected to increase 20%. The company reported strong fourth-quarter 2017 results, surpassing the Zacks Consensus Estimate on earnings and revenues. Its scale, size, commercial platform and industry-leading brands continue to drive unit growth.
Marriott's earnings for 2018 are projected to increase 21.6%. The company's strong fourth-quarter 2017 results surpassed the consensus mark on both counts. Marriott continues to benefit from the Starwood acquisition, rising North American business, sizable international exposure and an attractive brand position.
Intercontinental Hotels has reasonable earnings growth prospects as the lodgings industry continues to strengthen. The company's earnings for 2018 are projected to increase 12.1%. Its asset-light strategy complements its pricing levels and facilitates free cash growth.
Despite being a Zacks Rank #3 (Hold) stock, we are optimistic about Wyndham, given its positive outlook for 2018.
With the economy showing signs of recovery, the lodging sector is likely to prove to be a worthy investment proposition in the near-to-medium term.
Particularly, hoteliers with experience, strong equity, compelling brands and unique ideas in great markets, and those that are solid borrowers and considered trustworthy will be able to expand and convert some of the challenges into opportunities going forward.
Also, hoteliers will have to be smart enough to capitalize on the shifting trends and adapt as per changing consumer expectations. Instead of offering intricate programs and schemes to gain customer loyalty, hotel companies must focus on a re-imagined technology strategy, and differentiated offerings to provide unmatched travel experiences. Loyalty will follow automatically.
Check out our latest " Hotel Industry Outlook " here for more on the current state of affairs from an earnings and valuation perspective as well as the trend for this important sector.
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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 reportWyndham Worldwide Corp (WYN): Free Stock Analysis ReportTwitter, Inc. (TWTR): Free Stock Analysis ReportTripAdvisor, Inc. (TRIP): Free Stock Analysis ReportMarriott International (MAR): Free Stock Analysis ReportIntercontinental Hotels Group (IHG): Free Stock Analysis ReportHilton Worldwide Holdings Inc. (HLT): Free Stock Analysis ReportHyatt Hotels Corporation (H): Free Stock Analysis ReportFacebook, Inc. (FB): Free Stock Analysis ReportChoice Hotels International, Inc. (CHH): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research