Hotels Gain from US Recovery: 2 Stock Picks - Analyst Blog

In keeping with the rebound in the domestic economy, the U.S. hotel industry is making major gains. This is particularly true of certain specific regions and is borne out by quarterly results of key hotel chains. At the same time, the global picture is a mixed one, making players with higher domestic stakes better bets.

Trouble in Nigeria, Russia

Hotels in Africa have been hit by concerns arising out of the Ebola outbreak. According to research company STR Global, Nigeria's most populated city Lagos has been significantly affected by the outbreak. Average daily rates, occupancy and revenue per available room have all moved southward in September.

Marriot International's ( MAR ) CFO Carl Berquist said last week that occupancy rates at its new acquisition in Nigeria, Protea Hotels, have fallen sharply in the third quarter. The company has also experienced group cancellations as far as South Africa. Berquist said that the situation was being examined carefully.

The industry is also facing trouble in Russia following the conflict over Ukraine. STR reveals that the hotel occupancy rate in the country dropped by around 15% in September compared to year-ago figures. Revenue per available room, (RevPAR) within the industry has plummeted 27%. The worst hit region was Moscow.

Higher International Exposure Hits Profits

While the US economy continues to recover at a steady clip, chains with higher exposure to international markets have been affected by a gloomy global outlook. Starwood Hotels & Resorts Worldwide Inc. ( HOT ) posted mixed third-quarter 2014 results. Adjusted earnings of 66 cents per share beat the Zacks Consensus Estimate of 65 cents by a penny. However, earnings declined 7% year over year owing to lower revenues.

Additionally, Hyatt Hotels Corp. ( H ) reported mixed third-quarter 2014 results, as earnings missed the Zacks Consensus Estimate while revenues beat the same.

Lower margins in the company's Southeast Asia, China, Australia, South Korea and Japan (ASPAC) and Europe, Africa, Middle East and Southwest Asia (EAME/SW Asia) segments hurt earnings in the quarter.

A slowdown in China and Europe has reduced domestic travel in their domestic markets. This has prevented hotels from increasing rates or pricing offerings to make substantial profits. Meanwhile, a stronger U.S. dollar means that companies also stand to lose when they convert foreign revenues into domestic currency.

U.S. Momentum Powers Gains

While overseas markets struggle, the U.S. has gained from stronger economic momentum. Additionally, Ebola fears have abated after the spread of the virus in the country was effectively contained. According to STR, RevPAR increased 10.8% compared to year-ago numbers with six markets experiencing a near 15% gain.

According to analysts, the hotel industry in the U.S. is still in the midst of a recovery which started five years ago. The first two years of this period coincided with the end of the recession and were essentially devoted to a sharp decline. It is only now that significant gains will be made. This is being borne out by strong results posted by major players.

Hilton Worldwide Holdings Inc.'s ( HLT ) adjusted earnings of 18 cents a share beat the Zacks Consensus Estimate of 17 cents by 5.9%. Revenues of $2.64 billion increased 8% year over year and beat the Zacks Consensus Estimate of $2.62 billion by 1%. Comparable system-wide RevPAR was up 8.8% in the U.S., compared to 3.4% in Asia.

Marriott International Inc.'s adjusted earnings of 65 cents beat the Zacks Consensus Estimate of 62 cents by 4.8% and were up 25% year over year. Revenues of $3.46 billion increased 9.5% year over year and also beat the Zacks Consensus Estimate of $3.45 billion by 0.3%. Comparable system-wide RevPAR in North America grew 8.7%.

According to STR, North America RevPAR across the U.S. increased 7.7% till September compared to last year. In comparison, the indicator declined 1.6% in the Asia-Pacific region while Western Europe experienced a marginal decline in September. Eastern Europe RevPAR til September slumped 9.4%.

Our Choices

Below we present two stocks which will gain from these trends, each of which also has a good Zacks Rank.

Marriott Vacations Worldwide Corp. ( VAC ) develops, markets, sells and manages vacations ownership and related products. The company markets its offerings under the Grand Residences by Marriott and Marriott Vacation Club brands. Marriot Vacations also develops, markets and sells vacations ownership and related products under the Ritz-Carlton Destination Club brand name. It is also the developer, marketer and seller of ownership residences under the Ritz-Carlton Residences brand name on a non-exclusive basis.

The company posted net revenue of $413 million, missing the Zacks Consensus Estimate of $418 million by 1.2%. However, it increased 0.7% year over year. The year-over-year increase reflects strong volume per guest (VPG) growth in North America.

North America VPG increased 6.9% year over year to $3,477 in the third quarter of 2014, driven mainly by an increase in the average number of points purchased per contract, higher pricing and a modest improvement in closing efficiency. North American vacation ownership contract sales were $148 million in the third quarter, increasing 2.1% year over year. Total contract sales were $153 million, up 0.7% year over year.

Marriott Vacations holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 22.2%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 24.7.

Extended Stay America, Inc. ( STAY ) owns and operates hotels throughout North America. The company is an owner and operator of around 700 hotels, with more than 75,000 rooms across 44 states in the US and Canada. It is an owner and operator of hotels with the Extended Stay America brand name. The company also owns and operates nearly 50 hotels in the economy stay segment and three Extended Stay Canada hotels.

Apart from a Zacks Rank #2 (Buy), the company has expected earnings growth of 88%. It has a P/E (F1) of 24.22x.

Strong demand in the U.S. is powering growth for the hotel industry. Even those chains with worldwide presence are gaining if they have substantial domestic holdings. This trend is expected to pick up in the days ahead. This is why these stocks would make good additions to your portfolio.

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STARWOOD HOTELS (HOT): Free Stock Analysis Report

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

HYATT HOTELS CP (H): Free Stock Analysis Report

MARRIOT VAC WW (VAC): Free Stock Analysis Report

EXTENDED STAY (STAY): Free Stock Analysis Report

HILTON WW HLDG (HLT): 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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