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Will Hotel Stocks Suffer from Global Growth Worries? - Industry Outlook

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Macroeconomic concerns in several emerging economies could spell trouble for the hotel industry. However, U.S. sales have been pretty solid and emerging markets still have great growth prospects.

Despite the strong domestic market, there are plenty of near-term factors to keep in mind before one invests in the hotel industry stocks. Below, we discuss some of these headwinds that investors may face in the near as well as long term:

Lingering Uncertainties in International Markets: Despite immense growth potential, hoteliers are still apprehensive of several macroeconomic issues in international markets, like the ongoing austerity measures in Europe resulting from the sovereign debt crisis and decelerating growth in Asia.

Moreover, high inflation rates, worsening unemployment and currency devaluation have arrested the overall Latin American sales, in countries like Brazil, Argentina and Venezuela. Hotel occupancy declined in all these countries in 2014, despite the boost from the soccer World Cup in Brazil. The weaker economy in Latin America, along with political turmoil translated into weaker tourism numbers in 2014. This was compounded further since Latin America was the only region where additions to supply outpaced demand, according to a report from Skift.

Troubles in Egypt and Syria have dampened the overall performance of the African and Middle Eastern region. Economic headwinds and political unrest have hampered growth in other parts of the world as well. Saudi visa restrictions due to the ongoing renovation in Mecca also remain a concern.

Uncertainty over the new government's policy in China is another issue. The new leadership in China has asked government officials to curtail extravagance. Tighter government expenditure is expected to affect the food and beverage businesses of the hoteliers, particularly in the northern and western parts where the government is a major customer. Although tourism in India has recovered post elections, the controversial anti-government protests in Thailand as well as political unrest in Hong Kong have significantly hurt the Asian business.

Further, concerns about Ebola are increasingly hurting tourism in many African countries such as Kenya, Nigeria and South Africa. Reportedly, several international airlines cancelled flights to Ebola-affected West African countries towards the end of 2014, significantly affecting tourism at popular African destinations.

Operating Margins Under Pressure: Though revenue per available room (RevPAR) has fairly picked up since the industry started recovering in 2009, operating margins are yet to reach the industry peak of 2007 in the U.S. due to the spike in overall inflation. As a result of economic uncertainty, it is now estimated that peak levels will not be scaled anytime soon. Further, hoteliers are looking to stand out and keep up with the changing tastes of guests through investments in technology, quick customer service and real-time marketing. These would dent hoteliers' margins even more.

Health Care Reforms to Hurt Profitability: Federal health care legislation mandates employers to provide health coverage to full-time employees who log in more than 30 hours per week. With this provision coming into effect, the cost of leading hoteliers would increase. This would hurt margins, going forward.

There are some names in the space that induce our cautious-to-bearish outlook. Currently, there is no company carrying a Zacks Rank #5 (Strong Sell). However, China Lodging Group, Ltd. ( HTHT ) has a Zacks Rank #4 (Sell) mainly due to China's economic slowdown, liquidity fears and a crackdown on luxury spending.

Bottom Line

The growth divergence between the U.S. and the rest of the world has been has been in place for some time and the trend is likely to persist. This is a net positive for the U.S. based hoteliers, but the dollar strength has the potential for weighing on tourism related revenues that the industry has been enjoying.

As you can see, there are plenty of reasons to be pessimistic about the hotel industry. But what about investing in the space right now? Are there opportunities for short-term investors?

Check out our latest Hotel Industry Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector of the economy now.

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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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