Hotels and Motels Industry Outlook: Short-Term Prospects Bleak

The Hotels and Motels industry is likely to be aided by growth in demand that supports increases in both occupancy and average daily rate (ADR). In fact, the occupancy rate in the United States touched the highest level in 30 years during first-quarter 2018. Per a STR (formerly known as Smith Travel Research) report, revenue per available room (RevPAR) increased 4% in second-quarter 2018, following a gain of 3.5% in the preceding quarter.

Further, we note that rising employment, higher real income, and increased household net worth reinforced consumer confidence. This resulted in a steady rise in business and leisure travel, and higher transaction volumes, which are likely to continue.

However, unfavorable governmental policies and uncertainty in certain markets remain concerns for the industry. Moreover, Donald Trump's stringent policies on immigration and tourist visas seem to have compelled international visitors to rethink their vacation plans in the United States. Travel and tourism has witnessed a sharp decline in the past few years.

Per Lodging Conference's recent report, trade war, labor and hotel supply are major issues for the hotel industry. According to president and CEO of Hospitality Investors Trust, Jon Mehlman, there were nearly 300,000 vacant positions in hospitality. However, due to a drop in unemployment rate, the vacant positions in the industry increased to more than 800,000 as of 2017.

With an improvement in the economy and drop in unemployment levels, industry players are struggling to control their largest operating expense - labor costs. Rising salaries, wages and benefits, as well as increased staffing levels add to labor costs. The near-term fate of the overall industry will thus be marred by anxiety among consumers regarding Trump's tariff policy.

Industry Lags S&P 500 & Sector

Despite increase in RevPAR and demand, concerns surrounding Trump's stringent policies related to immigration and tourism, rise in expenses and trade war have kept investors on the sidelines. The Zacks Hotels & Motels industry , a 17-stock group within the broader Zacks Consumer Discretionary Sector , has underperformed the S&P 500 index as well as its own sector over the past year.

While stocks in this industry have declined 2.7%, the Zacks S&P 500 Composite has rallied 15.8% and the Zacks Consumer Discretionary Sector has risen 10%.

One-Year Price Performance

Hotels & Motels Industry Looks Expensive

Since hotel stocks are debt laden, it makes sense to value those based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric considers not just its equity but also the level of debt on a company's balance sheet. For capital-intensive companies, the EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.

Despite the underperformance of the industry over the past year, the valuation currently looks really pricey. The industry currently has a trailing 12-month EV/EBITDA ratio of 15.26, which is below the high of 18.64 in the past year but above the median level of 13.07. Clearly, the aggregate valuation picture for the space appears rich.

The space looks quite pricey when compared to the market at large as the trailing 12-month EV/EBITDA ratio for the S&P 500 is 11.99 and the median level is 11.57.

Enterprise Value/EBITDA Ratio (TTM)

Underperformance May Continue Due to Bleak Earnings Outlook

In the short term, trade war, limited labor and hotel supply have raised investors apprehensions about the industry. Further, high labor costs are hurting profit.

But what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead. However, the above ratio analysis shows that the industry is currently overvalued.

One reliable measure that can help investors understand the industry's prospects for a solid price performance is the earnings outlook of its member companies. Empirical research shows that a company's earnings outlook significantly influences the performance of its stock.

One could get a good sense of a company's earnings outlook by comparing the consensus earnings expectation for the current financial year with last year's reported number, but an effective measure could be the magnitude and direction of the recent change in earnings estimates.

The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for the industry as well as the industry's aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings expectations for 2019 while the light blue line represents the same for 2018.

Price and Consensus: Zacks Hotels & Motels Industry

This becomes even clearer by focusing on the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.

Please note that the $2.35 EPS estimate for the industry in 2018 is not the actual bottom-up dollar estimate for every company within the Zacks Hotels & Motels industry but rather an illustrative aggregate figure created by our proprietary analytics model. The key factor to keep in mind is not the industry's earnings per share for 2018 but how this estimate has evolved recently.

As you can see here, the EPS estimate for 2018 has dropped from $2.76 at the end of February. In other words, the sell-side analysts covering the companies in the Zacks Hotels & Motels industry have been lowering their estimates.

Current Fiscal Year EPS Estimate Revisions

Zacks Industry Rank Indicates Cloudy Prospects

The group's Zacks Industry Rank , which is basically the average of the Zacks Rank of all the member stocks, indicates continued underperformance in the near term.

The Zacks Hotels & Motels industry currently carries a Zacks Industry Rank #155, which places it at the bottom 39% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Bottom Line

The U.S. hotel industry has been benefiting from several factors like a strong economy, higher income, increased consumer confidence and a strong labor market. As people are steadfast on spending time with loved ones and keep looking for unique experiences at all price points, the companies in the space believe that their diverse portfolio of offerings can continue to deliver on this growing demand.

However, continuous efforts to impose a travel ban targeting predominantly Muslim nations, along with the ban on a broad range of electronic devices in the cabins of U.S.-bound aircraft from certain countries and talks of expanding the same threaten travel demand to and from the United States.

Thus, as tourists plan to steer clear of Donald Trump's America, the local travel industry is bearing the brunt of his unpopular policies. With the United States losing some of its appeal as a destination, hotel businesses and the overall industry stare at billions in lost revenues.

Below are three stocks within the Hotels & Motels universe that have been witnessing negative earnings estimate revisions and carry a Zacks Rank #4 (Sell).

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Extended Stay America, Inc. (STAY): The company, which owns, operates, and manages hotels in the United States, has a Zacks Rank # 4. The Zacks Consensus Estimate for the current year has witnessed upward revision of 2 cents in the past 60 days. In the past three months, the stock has declined 8.9%.

Price and Consensus: STAY

Hilton Worldwide Holdings Inc. (HLT): The company owns, leases, manages, develops, and franchises hotels and resorts. Currently, the company has a Zacks Rank #4. The Zacks Consensus Estimate for the current quarter has witnessed downward revisions of 2.6% in the past 90 days.

Price and Consensus: HLT

Wyndham Hotels & Resorts, Inc. (WH): The company, which operates as a hotel franchisor worldwide has a Zacks Rank #4. The company's current year estimates have witnessed downward revisions of 3 cents in the past 60 days. In the past three months, the stock has declined 6.4%.

Price and Consensus: WH

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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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