Should Investors Have Reservations About Hospitality Companies?

In January, international law firm DLA Piper released its "2013 U.S. Hospitality Outlook Survey," which revealed that nearly 84% of the industry executives polled were bullish about their industry for this year. The most frequently-cited reasons for this optimism were expected economic growth in the U.S. and increased business travel and conventions.

Now that we are three-quarters through the year, have actual results supported this positive view? Today we look at two major hotel chains and one of the largest global cruise lines to find out.

Building on momentum from the second quarter
Wyndham Worldwide has more than 7,400 franchise hotels, which makes it the largest hotel company in the world based on number of properties. Wyndham also has a substantial presence in the vacation rental and vacation ownership (time-share) sectors.

The company had a splendid second quarter ending June 30, reporting a total system revenue increase of 10% compared to last year's second quarter. Revenues were up substantially in all three of its business units.

Recently-released third quarter results showed accelerated improvement in the company's operating results. Total revenue was up 13% to $1.4 billion. The lodging segment, Wyndham Hotel Group, achieved an outstanding 19% revenue increase compared with the same quarter last year. Revenue jumped 12% for the company's vacation rental segment. The vacation ownership segment's revenue increased 11%.    

Within the lodging segment, the all-important metric of revenue per available room, or RevPAR, was up 5.2% domestically and 3.4% systemwide. The two components of RevPAR, occupancy and average daily rate, were both up year-over-year. RevPAR was up in 13 of the company's 14 hotel brands, across all categories from more upscale Wyndham Hotels and Resorts to budget brands Super 8 and Days Inn.

Third quarter operating income was up 12% compared to the same quarter last year. The effect of the significant revenue increase combined with a modest 20 basis point increase in operating expenses as a percentage of revenues.

Franchising fever
Choice Hotels International is also a large hotel franchise company with 6,300 properties. Its strength is in the upper-mid, mid-price and budget segments of the industry, with brands such as Clarion, Comfort Inn, Econo Lodge and Rodeway Inn.

In the third quarter, total revenue was up 6% to $223 million compared with last year's third quarter. Occupancy rose 70 basis points, and average daily rate rose 1.9% resulting in a domestic RevPAR increase of 3%.

A 16% increase in selling, general and administrative costs and a 6% increase in marketing and reservation costs dampened the effect of the revenue increase, which resulted in just a 2% improvement in operating income to $66.5 million. As a percentage of revenue, operating income dropped from 31% in last year's third quarter to 29.8% this year.

Choice is pursuing an aggressive franchise expansion program with 455 hotels awaiting conversion, under construction, or approved for development. As CEO Stephen P. Joyce said in the earnings release, "Our franchising business continues to outperform our expectations." Domestic franchise contracts rose a whopping 45% for the quarter.

To spur development, the company initiated a program to offer prospective franchises financing, investment, and guaranteed support. The company anticipates committing $20-$40 million to this program annually.  

Profiting even in choppy economic waters
Royal Caribbean Cruises operates a total of 41 ships under six brands, including Royal Caribbean International and Celebrity Cruises. This is a truly global cruise line that reaches 455 destinations on seven continents.

This industry uses different metrics than the hotel industry. Net yields -- the combination of cruise ticket prices and guests' expenditures while on board ship -- is a key one. For the third quarter, Royal Caribbean reported that net yields were up 2.6% compared to the same quarter last year, a better performance than the company expected in its previous guidance. Total revenue was up 3.8% to just over $2.3 billion. 

Demand was strong in both Europe and Asia. On-board revenue yield was particularly robust, up 7% for the quarter.

Given the challenging economic environment, the company has been focused on achieving cost efficiencies. The success of these efforts was shown in the margin improvement for the first nine months of the year. Total cruise operating expenses as a percentage of revenue declined to 65.9%, compared with 66.3% for the same period last year.

Operating income year-to-date was up 5.7%. Remarkably, this was accomplished with a modest 1% increase in the number of passenger cruise days (the number of passengers carried multiplied by the number of days of their cruises).

The company has dynamic expansion plans for the next four years, with planned capital expenditures of more than $5 billion over that time. This will increase passenger capacity by nearly 7% in both 2015 and 2016.

What we learned
Choice is wise to go full speed ahead with development because during the recession the supply of hotel rooms increased at an anemic rate. In the last quarter, its operating results were good but not great. This would be my third choice.

With Royal Caribbean reporting that bookings for upcoming cruises in 2014 are looking favorable regarding both load factor and rate, combined with the company's effective cost management, it is clearly poised for further gains in revenues and earnings.    

Wyndham's results for the last two quarters were extremely impressive in terms of both revenue and operating income growth. This company would be my first choice, although Royal Caribbean is a close second.

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Brian Hill has no position in any stocks mentioned. The Motley Fool owns shares of Choice Hotels International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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