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RevPAR & ADR Growth Continue to Drive Hotels & Motels Stocks

Harendra Ray

The Zacks Hotels and Motels industry includes companies that own, lease, manage, develop, and franchise hotels and resorts. Some vacation ownership and exchange companies are also part of the space.

Let’s take a look at the industry’s three major themes:

  • The Hotels and Motels industry is likely to be driven by increase in occupancy and average daily rate (ADR). Per a STR (formerly known as Smith Travel Research) report, in first-quarter 2019, the U.S. hotel industry reported revenue per available room (RevPAR) and ADR growth of 1.5% and 1.1%, respectively. Moreover, occupancy rate in the first-quarter increased 0.4% to 61.8%. The industry witnessed rise in occupancy rate across all sectors, from luxury to economy. The momentum is likely to continue in 2019 but at a slower rate. That’s because most of the hotel companies in the United States have been witnessing slowing RevPAR trends of late owing to muted international visits.

  • The industry participants have been benefiting from several factors like a strong domestic 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, demand for offerings is on the rise. Per GlobalData, luxury hotels in the United States are likely to increase to 1,067 by the end of 2019. By 2022, the figure is likely to increase to 1,123. The hotel industry will benefit from increase in Chinese tourists to the United States.

  • However, higher costs continue to be a concern for the industry. 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 have been adding to labor costs.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Hotels and Motels industry is grouped within the broader Consumer Discretionary Sector.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates encouraging near-term prospects. The Zacks Hotels and Motels industry currently carries a Zacks Industry Rank #79, which places it in the top 31% of 256 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.

The industry’s position in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since Jan 31, 2019, the industry’s earnings estimate for the current year has gone up 1.5%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Underperforms S&P 500 & Sector

The Zacks Hotels and Motels industry has underperformed its own sector and the Zacks S&P 500 composite over the past year.

Over this period, the industry has declined 2% compared with the sector’s decline of 1.8%. The Zacks S&P 500 composite has however rallied 6% in the said time frame.

Hotels & Motels Industry’s Valuation

On the basis of the trailing 12-month EV/EBITDA, which is a commonly used multiple for valuing Hotels and Motels stocks, the industry is currently trading at 15.16X compared with the S&P 500’s 11.29X. It is also above the sector’s trailing 12-month EV/EBITDA ratio of 12.52X.

Over the last five years, the industry has traded as high as 23.00X, as low as 10.94X and at the median of 14.31X, as the chart below shows.

Bottom Line

Rise in occupancy rate and commercial transient demand will continue to drive the industry in 2019. Further, we note that rising employment, higher real income and increased household net worth reinforced consumer confidence and sentiment. This resulted in a steady rise in business and leisure travel, and higher transaction volumes, which are likely to continue. Moreover, increase in the number of luxury hotels will continue to drive the industry higher. However, limited labor and higher costs will remain overhangs.

None of the stocks in the Hotels and Motels space currently sport a Zacks Rank #1 (Strong Buy). So, we are presenting four stocks with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.  

Choice Hotels International, Inc. (CHH): The company is one of the largest hotel franchisors in the world. Earnings for 2019 are likely to witness growth of 7.5%. Further, the company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, with the average being 7.9%.

Price and Consensus: CHH

Red Lion Hotels Corporation (RLH): The company operates as a hospitality and leisure company in the United States. Earnings for 2019 are likely to witness growth of 102.2%.

Price and Consensus: RLH

Hilton Worldwide Holdings Inc. (HLT): The company owns, leases, manages, develops, and franchises hotels and resorts. Currently, the company has a Zacks Rank #2. Earnings beat the consensus estimate in three of the trailing four quarters, with the average being 5.6%. Earnings for 2019 are likely to witness growth of 39.1%.

Price and Consensus: HLT

Wyndham Destinations, Inc. (WYND): The company operates as a vacation ownership as well as exchange firm in the United States and worldwide. Earnings surpassed the consensus estimate in the preceding four quarters, with the average being 5.9%. Earnings for 2019 are likely to witness growth of 14.9%.

Price and Consensus: WYND

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