Hotel Industry Stock Outlook - Nov. 2015

U.S. Hotel Industry Recovers in Tune with Economic Growth

The U.S. hotel industry's strength has remained intact so far in 2015, reflecting a steady rise in business and leisure travel on the back of an improving economy. Favorable supply and demand balances, strong investor appetite thanks to higher transaction volumes and solid lodging fundamentals spread cheer across the industry. Moreover, hoteliers have moved from owning real estate to franchising their brand and services to better counter economic volatility.

Despite pockets of geopolitical instability and economic slowdown, this optimism should remain in place for the rest of this year and continue into 2016.

Does this mean that the hotel industry is lying on a bed of roses? Well, not really.

Hoteliers are scrambling for profits while trying to capitalize on growing tourism numbers. Higher costs and expenses incurred by leading hoteliers for renovation as well as digital and marketing initiatives to boost traffic are denting profits. Further, online travel agents like Expedia Inc. ( EXPE ) and The Priceline Group Inc. ( PCLN ) are limiting the pricing power of these brands.

Another major threat is home-sharing companies like Airbnb, Inc. which offers a digital service allowing tourists to book homes at holiday destinations. With low overhead costs and light regulations compared with hotel companies, these firms have made steady inroads into the industry and are grabbing market share away from giants like Starwood Hotels & Resorts Worldwide Inc. ( HOT ), Marriott International, Inc. ( MAR ) and Hilton Worldwide Holdings Inc. ( HLT ).

In fact, Marriott's recent deal to acquire Starwood Hotels for $12.2 billion is being viewed as a move to combat the rising threat from online travel agents and home-sharing companies. Other hoteliers like Hyatt Hotels Corp. ( H ) and Wyndham Worldwide Corp. ( WYN ) are also investing in home sharing start-ups.

Statistics underscore the intense competition in the hotel industry. A recent report by PricewaterhouseCoopers (PwC) shows that the lodging sector did not witness significant average daily rate (ADR) growth in the past few months.

As a result of persistent pricing challenges, PwC slightly lowered the 2015 outlook for hotels to 6.5% revenue per available room (RevPAR) growth, due to lower-than-expected increase in ADR. However, overall the demand conditions in the U.S. remained strong, contributing to the increasing occupancy levels this year.

Notwithstanding the common macroeconomic hurdles, the lodging sector is expected to deliver growth in 2016, thanks to the improving U.S. business and solid international travel and tourism volumes.

In 2015, both transient and group demand exhibited solid momentum, with the year-over-year pace of recovery in group demand outpacing that of the transient segment. While this momentum in group demand is expected to continue, mega sporting events like the Olympics in South America should boost tourism in 2016.

The lodging performance indicators also showed year-over-year improvement. According to Smith Travel Research (STR), the leading information and data provider for the lodging industry, the ADR at U.S. hotels was up 3.7% year over year for the week ended Nov 14, 2015. Overall occupancy went up 2.4% year over year and RevPAR grew 6.2% for the same time frame.

As hoteliers strive to enhance value and competitiveness, industry-best practices such as sustainability, brand refreshment and increased visibility through technological innovation and social networking, especially among the millennial, will remain the priorities.

Zacks Industry Rank - Positive

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 an impressive #81 among the other industries ranked, indicating the group's near-term positive outlook.

The group's positive Zacks Rank placement is essentially a function of improved top line and increased occupancy numbers at many companies, primarily due to increased tourism numbers and greater demand.

Earnings Trends

The third-quarter earnings season has shown a mixed trend in the hotel and motel industry.

While Starwood Hotels surpassed the Zacks Consensus Estimate for earnings, it missed the same for revenues marginally. Similarly, Marriott beat the consensus mark for earnings but lagged the revenue estimates. Wyndham Worldwide, on the other hand, outperformed our estimates for both earnings and revenues.

The hotel industry falls under the broader Consumer Discretionary sector.

The earnings "beat ratio" for the Consumer Discretionary sector is 74.4%, while the revenue "beat ratio" is 41% in the third quarter. Total earnings for this sector increased 2.8% in the reported quarter, compared with 2.2% in the second quarter. Total revenue grew 1.8% as against 1.4% increase in the previous quarter.

Fourth-quarter 2015 earnings are expected to decline 3.9%, whereas revenues are expected to decline 10.8% in the fourth quarter of 2015, pegging the full-year 2015 growth outlook at 5.3%. For 2016, the sector's revenues are poised to expand around 15.8%.

For more details about earnings for this sector and others, please read our ' Earnings Trends ' report.

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WYNDHAM WORLDWD (WYN): Free Stock Analysis Report

PRICELINE.COM (PCLN): Free Stock Analysis Report

MARRIOTT INTL-A (MAR): Free Stock Analysis Report

STARWOOD HOTELS (HOT): Free Stock Analysis Report

HILTON WW HLDG (HLT): Free Stock Analysis Report

HYATT HOTELS CP (H): Free Stock Analysis Report

EXPEDIA INC (EXPE): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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