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Growth & Income

Todd Bunton

InterContinental Hotels Group Plc

IHG

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InterContinental Hotels Group Plc (IHG - Snapshot Report) recently reported better-than-expected results for the second quarter of 2011. Earnings per share rose 19% year-over-year and came in 9% above the Zacks Consensus Estimate as revenue rose 11%.

Analysts revised their earnings estimates higher for both 2011 and 2012 following the strong quarter, sending the stock to a Zacks #2 Rank (Buy).

IHG also pays a dividend that yields a solid 1.8%. Valuation looks attractive too, with shares trading at a significant discount to the industry average.

Company Description

InterContinental Hotels Group operates seven hotel brands including InterContinental® Hotels & Resorts, Hotel Indigo®, Crowne Plaza® Hotels & Resorts, Holiday Inn® Hotels and Resorts, Holiday Inn Express®, Staybridge Suites® and Candlewood Suites®.

It is headquartered in Denham, the United Kingdom and has a market cap of $4.9 billion.

Second Quarter Results

InterContinental Hotels Group reported its results for the second quarter of 2011 on August 9. Total revenue rose 10.7% to $454 million, beating the Zacks Consensus Estimate of $429 million. Revenue per available room increased 6.5%, driven both by increased occupancy from business and leisure travelers as well as higher room rates.

Revenue was up across all geographic regions but strongest in the Europe, Middle East and Africa group, which saw revenue growth of 26.5%. Revenue in the Americas, which accounted for 49% of total revenue, increased 3.3%.

Operating income rose 15.4% year-over-year as the company leveraged its fixed expenses. Earnings per share rose 19.3% to 35 cents, beating the Zacks Consensus Estimate by 3 cents.

Outlook

Analysts revised their estimates higher for both 2011 and 2012 following the strong second quarter results, sending the stock to a Zacks #2 Rank (Buy). As you can see in the Price & Consensus chart, consensus estimates have been steadily rising over the last several months:

IHG: InterContinental Hotels Group Plc

This strong earnings momentum has been driven by a couple of factors. First, the travel industry has rebounded a bit from the doldrums of the Great Recession, which has led to decent revenue growth at IHG. Second, because the hotel industry has a relatively high amount of fixed costs, modest revenue growth has led to strong EPS growth due to operating leverage.

Analysts expect this strong earnings growth to continue over the next two years. The Zacks Consensus Estimate for 2011 is $1.18, representing 25% EPS growth over 2010. The 2012 consensus estimate is 16% higher at $1.37.

Fundamentals

In addition to this growth, investors get a dividend that yields 1.8%.

The valuation picture looks attractive too, with shares trading at just 12.9x 12-month forward earnings, a significant discount to the industry average of 16.9x and its 10-year median of 17.5x.

The Bottom Line

InterContinental Hotels Group operates some of the most recognized hotels in the world. As the travel industry continues to rebound, expect double-digit EPS growth to continue over the next couple of years. With strong growth and a 1.8% dividend yield, shares look attractive at just 12.9x forward earnings.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research.

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