Inside Wall Street: Four Hotel Stocks You Can Rest Easy With

Gene Marcial's Inside Wall StreetA surprising pickup in business and vacation travel in recent months has energized the otherwise languid hotel business. Analysts now expect the uptick in bookings and room rates from their low levels in the past two years to continue as the economy gains increasing strength.

So, investors have been doing some cherry-picking in the hotel group for stocks that are hot or soon-to-be as occupancy rates climb. The shrinking supply of rooms due to industry cutbacks has also helped lift lodging revenues. The improving sentiment among corporate chiefs based on a brighter business outlook combined with the reduced number of hotel rooms has prompted many major hotel companies to raise their expectations for profitability and revenue per available room (known as RevPAR) for this year and next.

Here are four hotel stocks that Wall Street is starting to get excited about based on their improving prospects:
  • Starwood Hotels & Resorts Worldwide (HOT), one of the world's largest lodging companies, with more than 1,000 hotels in about 100 countries. Its shares are currently trading at $58.
  • Hyatt Hotels (H), a globally famous brand that's been a mainstay in the lodging industry for more than 50 years, currently operating 421 properties with about 124,000 rooms. Its stock is trading at $41 a share.
  • Wyndham Worldwide (WYN), one of the world's largest hospitality companies, whose services include vacation exchange and rental business commonly called time-share lodging. Its shares currently trade at $29 a share.
  • Choice Hotels International (CHH), a leading hotel franchisor with more than 6,000 locations in the U.S. and some 40 other countries. Its flagship brands include Comfort Inn, Quality Inn and Econo Lodge. Its stock is trading at $36 a share.
"Hotel companies ought to gain pricing power in the quarters ahead, since we expect room-supply growth rates to approximate 1% to 1.2% for the next couple of years," says Dominic B. Silva, industry analyst at investment research firm Value Line. In a report on the industry, Silva says that's an improvement because rooms in the supply chain have fallen to 1.5% of current room inventories, down from its peak of 5% in 2007.

Momentum Is Likely to Continue

Lodging companies were "buoyed by momentum in corporate and group bookings," says the analyst, who reports sharp "advances in profitability and key metrics, including occupancy, RevPAR and average daily rates." There are indications, adds Silva, that the momentum is likely to continue and enable the hotel companies to implement room-rate hikes.

At Starwood, growth is coming from its international exposure: 40% of its rooms are located outside the U.S. The upswing in corporate and group bookings -- which account for some 70% to 80% of business -- in major cities in the U.S. and abroad have strengthened operating conditions, notes Silva.

Standard & Poor's analyst Esther Y. Kwon believes Starwood is positioned to "disproportionately benefit from stronger international economies," and she expects major metropolitan markets in which Starwood has higher exposure to outperform.

Starwood is expected to earn between $1.05 to $1.07 a share in 2010 on projected revenues of $3 billion, up from 2009's $1.01 a share on $2.7 billion in revenues.

"Stronger and Quicker"

Hyatt Hotels "offers compelling fundamentals and has the strongest balance sheet in the industry, giving it substantial flexibility," says David K. Peterson, analyst at Bank of America Merrill Lynch, who rates the stock a buy. The recovery in lodging has been "stronger and quicker than most anticipated," he notes. RevPAR exceeded expectations, he adds, posting "solid gains" in the first half of 2010.

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Hyatt has $1.2 billion in cash on its balance sheet, $400 million in short-term investments, and $1.1 billion in "undrawn revolver" credit lines. Indeed, Hyatt could either make acquisitions or return cash to shareholders. Peterson believes the question isn't whether it will make an acquisition with part of its cash, but how large. "Our analysis is it can make a sizable acquisition and comfortably remain investment-grade," says the analyst.

Robert A. Fleur, analyst at Hudson Securities, favors Wyndham Worldwide, in part because of its free cash flow that "just keeps on getting better." Wyndham remains "our top pick in the lodging space," says LaFleur, who rates it a buy with a 12-month target of $35 a share, based on a sum-of-the-parts valuation.

The stock's current price-earnings multiple doesn't adequately capture the value of its vacation exchange and rental business, figures LaFleur. It's a resilient cash cow, with low volatility of earnings, and it doesn't much require capital spending to maintain strong growth, he says.

Pure-Play Franchise Business

Choice Hotels is worth $40 a share, based on 22 times the 2011 earnings estimate of $1.81 a share, says Rachael Rothman, analyst at Susquehanna Investment Group, who rates the stock a buy. Her valuation, she notes, is consistent with where the shares traded in the early part of the last recovery in 2004. In 2009, Choice earned $1.72 a share.

One of Choice's attractions is its business model, says Robin M. Farley, analyst at UBS, who notes that Choice is the only publicly traded lodging company to operate a pure-play franchise business, which provides the least volatile revenue stream. The company's revenues are almost entirely dependent, notes Farley, on franchise fees paid by its franchisors, thus subject to a minimum of operating leverage.

Since the travel business is highly cyclical, the ultimate play in the these hotel stocks is to ride with the industry upswing as the global economy continues to inch higher. The group is a good place to stay when times are good.
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