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Vacation on Your Mind: How About Investing in Hotel Stocks?

Zacks Equity Research

Despite economic and political upheaval in certain pockets all over the world, people are steadfast on spending time with loved ones. They're looking for unique experiences at all price points, and hoteliers believe that their diverse portfolio of travel offerings can continue to deliver on that growing demand.

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

Demand-Supply Gap: The recovery in the broader economy has been a boon for the hotel industry as it has perked up leisure and transient business travel demand. According to Hyatt Hotels Corporation (H) and Hilton Worldwide Holdings Inc. (HLT), the supply-demand environment in the U.S. is favorable. We note that demand growth in the U.S. has outpaced supply growth each year since 2010.

Meanwhile, though the gap between demand growth and supply growth continues to narrow and occupancy growth has slowed, higher rates are expected to keep driving revenue per available room (RevPAR). Considering the long pipeline of hotels, Smith Travel Research (STR) expects the sector’s demand and supply growth to be equal at 1.6% in the U.S. in 2016.

International Expansion: Major hoteliers are exploring growth opportunities abroad, especially in the emerging markets and the outlying areas surrounding major cities. Despite macroeconomic concerns in several emerging economies, hoteliers are forging ahead with expansion plans in markets with great long-term potential.

A number of U.S.-based hoteliers are targeting the unsaturated markets in Asia-Pacific, the Middle East, Brazil, Russia and Africa. Within Asia, China promises lucrative growth opportunities, despite the economic slowdown, with visits expected to increase substantially, moving ahead. In fact, China is the fastest growing lodging market in the world. Interestingly, the country is a major revenue contributor for Marriott International, Inc. (MAR).

Apart from China, India is becoming a hot spot for U.S.-based hoteliers with its emergence 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. Among others, Japan, Australia, Singapore and Thailand continue to attract travelers. The key players in the industry are also targeting the high-potential Middle East countries such as Turkey and United Arab Emirates (UAE) that offer strong infrastructure.

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

Brand Renovation to Boost Growth: Hotel chains are meticulously working on guest satisfaction via brand conversion and re-modeling to gain a competitive advantage. Remodeling mostly involves restoration of lobbies and other public spaces, preservation of decorative features if possible, and guestroom upgrades to make the brand more relevant. In fact, brand perception is likely to have a growing influence on the mass market as well as luxury space. With the market becoming increasingly saturated, especially the luxury segment, hotels will have to differentiate themselves.

Brands that can offer something uniquely compelling are likely to grab market share and thus the ability to innovate will be their key to success. Therefore, ace hoteliers like Marriott, Belmond Ltd. (BEL) and Hyatt are firing on all cylinders to sync their brands to the order of the day. All these companies carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Moreover, in recent times, brand development is being shaped not only by economic trends, but also by millennials’ tastes. It is Gen Y that constitutes a major portion of the current tourism numbers and their tastes and expectations are widely different from their preceding generations. According to players in the hospitality sector, eco-awareness, wellness and brand distinctiveness are important themes for this generation. Big hotel brands are thus launching more lifestyle hotels, which are mainly boutique brands that benefit from parent companies’ infrastructure. These include brands like Marriott’s Element, Aloft and Edition; Andaz by Hyatt; and InterContinental Hotels Group’s (IHG) Hotel Indigo.

Loyalty Programs: In order to survive in a tough economic environment, hoteliers are continuously devising newer ways to enhance guest experience and raise occupancy, and offering of loyalty programs is one of them. Thus, hoteliers have been increasingly focusing on their loyalty programs as rewards members stay longer than nonmembers and also generate more in revenue for their franchisees.

Notably, Wyndham Rewards offers one of the most generous reward program payouts in the industry. Recently, management announced that Wyndham would be the first hospitality company to globally expand the use of its loyalty program across vacation ownership and vacation rental properties. Meanwhile, post its acquisition of Starwood, Marriott linked industry-leading guest loyalty programs – Marriott Rewards, Ritz-Carlton Rewards, and Starwood Preferred Guest – and announced the matching of member status between the programs. The company believes that the linking of the three loyalty programs would lead to an even larger loyalty community.

Loyalty programs are thus the key to better brand experience and hoteliers are continuously reengineering these to provide a more fulfilling experience.

Embracing Social Media and Smartphone Technology to Build Loyalty: In today’s world of price comparison and shared economy, hotels have to constantly push their boundaries to retain customers. 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. Moreover, hoteliers are using apps to help guests manage bookings and are offering interactive maps/GPS to increase occupancy.

In fact, according to Navis, a leading innovative hospitality technology solution provider – which quoted eMarketer's estimates of digital and travel research and booking – 51.8% of travelers who book trips digitally in 2016 will do so through a mobile device. This is a sharp uptick from 43.8% in 2015 and highlights the importance of smartphones in online travel.

In fact, mobile check-ins and check-outs have increased substantially over the past two years as the service is helping guests to use their smart devices to connect with the hotel for faster and seamless check in/check out. Hoteliers are therefore looking to introduce responsive designs in their apps, one-click booking, and location technology to improve operating efficiencies and enhance guest services. Being tech savvy is thus no longer an option but a necessity to survive in the intensely competitive hotel industry.

Many hotel companies are also setting up analytics tools to understand consumer preferences — and deliver a differentiated experience — which could eventually motivate customers to visit frequently, stay longer and spend more.

Bottom Line

The lodging sector will prove to be a worthy investment proposition in the near- to medium term provided the economy continues to shows signs of recovery. This in turn will perk up investor confidence and lead to greater demand, thereby boosting hoteliers’ profitability.

Check out our latest “Hotel Industry Outlook” here for more on the current state of affairs from an earnings perspective and the trend for this important sector.


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