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Can the U.S. Hotel Industry Continue Its Robust Performance?

Zacks Equity Research

Impressive performances by U.S. hotel companies in first-quarter 2018 has raised expectations for the remainder of the year.

Underpinning this favorable view is the positive outlook for the U.S. economy, thanks to healthy consumer spending, a strong labor market, rising government expenditures and increased consumer confidence.

The U.S. economy is anticipated to grow at an annualized rate of 4% in the second quarter, per the Atlanta Federal Reserve’s GDPNow forecast model (as of May 25). This marks a sharp increase from 2.3% GDP growth registered in the first quarter of 2018.  Robust domestic data gives an indication that the industry will continue its bull run in the second half of 2018.

Thus, there are plenty of reasons to be optimistic about the broader hotel industry over the short and the long term. Below, we discuss what investors can look forward to in the coming period:

Steady Growth in Demand

The supply-demand environment in the United States has been favorable since 2010 with growth in demand outpacing supply growth. Though, of late, the gap between demand and supply growth has narrowed considerably and occupancy growth has decelerated, higher average daily rates (ADRs) will continue to drive revenue per available room (RevPAR).

Given the positive economic outlook for the remainder of the year, which could result in the ninth successive year of occupancy growth for the U.S. lodging industry, PricewaterhouseCoopers (PwC) projects demand (+2.4%) to outpace supply (+2.0%) in 2018. Further, in 2019, it anticipates demand and supply growth of 1.9% each. Occupancy in 2018 is likely to increase 0.3% to 66.3%.

International Expansion to Drive Growth

Most of the hotel companies are exploring international expansion, especially in relatively untapped emerging markets and the outlying areas surrounding major cities. Unsaturated markets in the Asia Pacific, the Middle East, Brazil, Russia and Africa are being targeted by hospitality companies.

China, which is the largest source market for outbound travel, is the most significant market for the hotel industry. In less than two decades China has become the world’s most powerful outbound market for hotels and leisure.

Interestingly, the country is a major revenue contributor for Marriott International, Inc. (MAR) which entered into a joint venture with Alibaba with an aim to improve market share, expand membership of its loyalty programs and reduce distribution costs. India is also becoming a hot spot for U.S.-based hotel businesses as it gains precedence as a global business hub. Although economic growth rates are slightly lower than China, the country has great long-term growth potential as a tourism market.

In fact, Hyatt Hotels Corp.’s (H) major target markets include India and China. Apart from these, the company also has expansion plans for diverse international markets including Australia, Brazil, Germany, United Kingdom, Indonesia, Japan, Mexico, Saudi Arabia, Singapore, Thailand and the Netherlands, among others.

Meanwhile, Europe remains an attractive market despite repeated terror attacks and Brexit-induced uncertainties. Major players like Marriott, Hilton Worldwide (HLT), Choice Hotels (CHH) and WyndhamWorldwide (WYN) have a strong foothold in this region.

Several players in the space are also looking to leverage from rise in accommodation demand in Latin America. In this respect, WyndhamHotel Group acquired Latin America's leading Fen Hotels. Meanwhile, with an increasing number of managed and franchised limited service hotels in Mexico, Colombia and Brazil, Marriott expects its distribution in the Caribbean and Latin American region to increase 75% by 2018.

Loyalty Programs Attract Customers

Loyalty programs are one of the major driving factors in the hotel industry. In order to survive in a tough economic environment, the companies continuously devise ways to enhance guest experience and raise occupancy. Given the fact that reward members stay longer than non-members and generate more revenues for their franchisees, hotel chains have been increasingly focusing on loyalty programs.

Hilton has created one of the largest loyalty programs, Hilton Honors. With about 74 million members, this network has created an extremely valuable asset for the company. In 2017, the company added over 11 million members to the program. Also, in the first quarter of 2018, more than 3 million members were added to Hilton Honors. Innovations such as the Hilton Honors app continue to drive growth in the program.

With about 52 million members, Wyndham Rewards offers one of the most generous reward program payouts in the industry. In fact, per a recent study conducted by Ideaworks Company, Wyndham Rewards is touted as the most-rewarding loyalty program in the U.S. hotel industry.

Recently, Marriott International announced its plans to unify its loyalty program benefits across Marriott Rewards, The Ritz-Carlton Rewards and Starwood Preferred Guest (SPG) in August. The combined loyalty program is expected to provide richer perks to the company’s loyalty members by enabling them to earn roughly 20% points for every dollar spent.

The new loyalty program will provide members more than what was offered under the prior programs. Under this global loyalty program, members can book stays, and earn or redeem points across 29 brands covering 6,500 hotels in 127 countries and territories.

Digital Innovations

In an era of stiff competition, hotel companies are leaving no stone unturned to drive growth. In this regard, digital innovation and social media have started to play a key role. Social media can enhance a brand’s prospects by connecting directly with guests, especially millennials and can, in turn, increase loyalty and market share. Social media sites like Facebook, Inc. (FB), Twitter, Inc. (TWTR) and TripAdvisor Inc. (TRIP) are commonly used by travelers to select hotels and in this way these enhance a brand’s prospects by connecting directly with guests.

Moreover, hotel chains use apps to help guests manage bookings and offer interactive maps/GPS to increase occupancy and offer a faster and seamless experience. The companies are investing in mobile check-in, fast Wi-Fi and digital room keys to enhance guest experience.

In fact, mobile check-ins and check-outs have increased substantially over the past few years and so has the enthusiasm for chat-based messaging apps, like chatbots, among potential customers. Being tech savvy is thus no longer an option but a necessity to survive in the intensely competitive hotel industry.

The companies are also using analytics tools to understand consumer preferences and deliver a differentiated experience, which could eventually motivate customers to visit frequently, stay longer and spend more.

Key Picks

Currently, a top-ranked stock in the hotel space is Marriott Vacations Worldwide Corp. (VAC), carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Marriott Vacations’ earnings for 2018 are projected to increase 22.3%. The company reported better-than-expected earnings in the trailing three out of four quarters, with an average beat of 19.5%.

Stocks like Extended Stay America, Inc. (STAY), Hilton Worldwide and Hyatt Hotels, with a Zacks Rank #3 (Hold), are also likely to do well given positive industry sentiments.

Clearly, the hotel industry offers plenty of reasons to be optimistic about it over the long term. So how about investing in the space right now?

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 the industry.

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Marriot Vacations Worldwide Corporation (VAC) : Free Stock Analysis Report
Twitter, Inc. (TWTR) : Free Stock Analysis Report
TripAdvisor, Inc. (TRIP) : Free Stock Analysis Report
Extended Stay America, Inc. (STAY) : Free Stock Analysis Report
Marriott International (MAR) : Free Stock Analysis Report
Hilton Worldwide Holdings Inc. (HLT) : Free Stock Analysis Report
Hyatt Hotels Corporation (H) : Free Stock Analysis Report
Facebook, Inc. (FB) : Free Stock Analysis Report
Choice Hotels International, Inc. (CHH) : Free Stock Analysis Report
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