The summer travel season is long past, but that should not cause investors to ignore the lodging industry. Vacationing remains popular and business activity is supportive to travel despite the use of technology - teleconferencing and Skype can only go so far. Smith Travel is looking for 2014 Revenue per Available Room (RevPAR) to rise 6.0%. The outlook for activity seems favorable in light of a slow growth global economy. The graphic below displays the trend in U.S. RevPAR on a year over year basis since 2011. Notice that year over year growth has ranged from about 2.5% to 6.0% since late April.
Outside of the U.S., it looks like activity in Asia has slowed given the softer tone of EM growth. Smith Travel noted that RevPAR had declined 3.2% year to date through August. In contrast, European demand has picked up, but travelers are viewed as cost conscious. Demand in Europe was reported up 2.6% over the past twelve months with an average daily room rate increase of 1.7%. Demand in Europe has surpassed that in the U.S. for the first time since October 2010. If the global economy is on an upswing, it should support the lodging industry, especially in Europe and Asia.
Let’s take a look at some well-known lodging companies to see which stocks may provide some rest for your portfolio.
Earnings revisions and growth outlook:
The table below displays the trend in earnings per share revisions over the past 30 days, expected earnings per share growth for 2014, and forecast sales growth for 2014. There is also a column for the Zacks Rank. A Rank of #1 is a strong buy, while a Rank of #5 is a strong sell. The Rank of #3 is a hold. The Zacks Rank is based on the strength of earnings estimate revisions by analysts.
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The table shows limited change in earnings in recent weeks. Marcus (MCS) and Host (HST) have seen their numbers bumped marginally higher for 2013. Looking to 2014, Hyatt (H) has seen its EPS estimate cut slightly and Intercontinental has seen its EPS forecast lift marginally. Analysts do not see conditions changing dramatically going into earnings season. Future estimate changes are most likely to come after companies report profits.
2014 earnings growth is expected to be vibrant in the sector with Marriott (MAR) and H expected to display growth in excess of 17% y/y. Orient Express (OEH) is a stand out in the table with growth forecast to jump over 80% y/y. There is a turnaround occurring here. For the group, earnings per share are expected to rise 20.5% y/y on average (simple group average). The median growth rate of 10.8% y/y, and may be a better measure of the group’s potential given the skew created by OEH.
Sales growth is forecast to be less strong than earnings growth, but still expected to rise in the mid signal digits. The average for the group is 5.7% with MAR and OEH displaying the greatest strength. The numbers are consistent with the macro forecast for RevPAR.
Three measures of valuation are displayed in the table below. The 12 month forward PE ratio, the PEG ratio, and the price to sales ratio are used to reflect on valuation for the companies.
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The forward price to earnings ratio has a wide range of values. The low company is HST at 12.6, while the high company is OEH at 45.6. The history for H is limited and this discounts the usefulness of the premium and discount column for this particular name. HST looks like the most inexpensive name followed by Windham.
The PEG ratio, price to earnings to growth rate in earnings, for the group is also disbursed. Choice (CHH) has the largest PEG ratio at 5.2, while Wyndham (WYN) has the lowest PEG ratio at 0.8. The PEG ratio at CHH has been lifting over time. The average for the group is 2.2, but the median is a better measure at 1.3. CHH distorts the average,
On the bases of the price to sales ratio, IHG is the most expensive while MCS is the most inexpensive. Not only is MCS cheap outright, but relative to its median. The sector is trading on the rich side of its price to sales ratio compared to its historical median and average.
If the companies are ordered by valuation measures, MCS is the most inexpensive followed by WYN. OEH and CHH were most expensive. The stocks were ordered by valuation with the company having the lowest valuation receiving a one and the company with the highest valuation being assigned an eight. The orders were then averaged for each of the metrics for a final composite result and ranking. This method assumes the valuation metrics are equally important to pricing.
Mixing value and growth:
MCS looks like a value play, but the valuation is being pressured by a low outlook for sales and earnings growth in 2014. The market may be pricing MCS at a discount to the peer group due to its lower growth rate.
Looking at WYN, the outlook is slightly more favorable. Sales growth is expected to rise more than average at 6.5%, but earnings growth is less vibrant at 10.9%. Both measures are just above the median of the peer group. It’s Zacks Rank of #3 reduces its appeal.
HST may be the winning pick. It is a Zacks Rank #2 which suggests it has support from earnings estimate revisions, and it was in third place in terms of its valuation measures. The earnings and sales growth is respectable near the median. The company is organized as a REIT and pays a 2.70% yield. HST tends to service the upper end of the lodging market and has exposure to Europe which seems to be an area of building economic strength.
The technicals are turning friendly:
Technically, HST is in a large consolidation pattern. A rally over $19 could spark a new leg higher from the 2012 low under $14. Momentum buyers could become interested in the stock on a push over $19. A close under $17 would question the friendly chart set up.
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The lodging industry does not have a great deal of sex appeal, but looks ripe for solid growth going into 2014 based on industry forecasts. A building global recovery will bode well for the industry. HST may the place for your portfolio to find rest as it travels through the investment world.
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