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Industry Outlook

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Hotel Industry Grows at Steady Pace: Will It Continue?

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The hotel industry has been on the path of recovery for quite some time now on the back of an improving economy. Demand continues to remain strong, contributing to the increasing occupancy levels this year. In spite of economic and political upheaval in certain pockets all over the world, sales have risen on an average and been robust in the U.S. However, the lack of significant average daily growth remains a concern.

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

Demand Exceeds Supply: The gradual recovery in the broader economy has been a boon for the hotel industry as it has perked up leisure and transient business travel demand. With limited supply and strong demand, room rates are increasing. According to Hyatt Hotels Corporation (H) and Hilton Worldwide Holdings Inc. (HLT), the supply-demand environment in the U.S. is favorable as demand growth is better than supply, which is below the long-term average.

This would lead to rate increases, and thereby drive revenue per available room (RevPAR). In fact, despite the large pipeline of hotels, Smith Travel Research (STR) expects the sector’s demand growth in 2015 to be 2.9% in the U.S. with only 1.2% increase in supply.

North American Occupancy Trends Strong: System-wide occupancies in North America appear pretty steady and mostly above the prior peak achieved in 2006. The solid occupancy levels go hand-in-hand with the gradual economic recovery in the region. The hotel companies are poised to grow in the wake of easier lending standards and improvement in the travel and tourism industry.

For Starwood Hotels & Resorts Worldwide Inc. (HOT), North America is still the largest market where it plans to open most of its hotels. The company expects 2016 to be yet another year of robust growth in this region.

International Expansion: Major hoteliers are exploring growth opportunities abroad, especially in the emerging markets and the outlying areas surrounding major cities. These markets offer greater potential driven by the higher pace of economic growth

A number of U.S.-based hoteliers are targeting the unsaturated markets of the Asia-Pacific, Brazil, Russia and Africa. Within Asia, China promises lucrative growth opportunities, despite the economic slowdown, with visits expected to increase substantially in 2016. In fact, the country is a major revenue contributor for both Starwood Hotels and Marriott International, Inc. (MAR).

Apart from China, India is becoming a hot spot for western 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.

Major players in the industry are also eying high-potential countries such as Turkey, United Arab Emirates (UAE) and South Korea that offer strong infrastructure.

Growth in Brazil and Argentina continue to be sluggish, mainly due to economic slowdown. Brazil is scheduled to host another mega sporting event — 2016 Summer Olympics — which should boost tourism to a certain extent.

The Europe market is also improving. In fact, select markets in Southern Europe that were hit by the recession, are turning around. The bullish trend can be validated by Starwood’s system-wide occupancy data in 2014, which was an impressive 69.2% in Europe. Other major players like Hilton Worldwide, Choice Hotels International Inc. (CHH) and Wyndham Worldwide Corporation (WYN) are also targeting this market.

Brand Renovation to Boost Growth: Hotel companies are diligently working on guest satisfaction via brand conversion and re-modeling for better countering competition. In fact, brand perception is likely to have a growing influence on the mass-market as well as the 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 the ability to innovate will be the key to success. Therefore, many leading hoteliers like Starwood Hotels, Marriott International, Belmond Ltd. (BEL), Hyatt Hotels and The Marcus Corporation (MCS) are firing on all cylinders to make their brands more relevant in today’s environment.

Building Loyalty via Social Media and Smartphone Technology: Digital innovation and social media are starting to play an increasingly important role in the hotel industry. Social media can enhance a brand’s prospects by connecting directly with guests, especially the 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 playing an increasingly important role in helping travelers select a hotel.

Moreover, a higher number of hoteliers are using apps to help guests manage bookings, interactive maps/GPS as well as reward programs. Being tech savvy is no longer an option but a necessity to survive in the hotel industry.

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

Currently, China Lodging Group, Limited (HTHT) sports a Zacks Rank #1 (Strong Buy). However, Belmond, Extended Stay America, Inc. (STAY) and Wyndham have a Zacks Rank #2 (Buy).

Despite being Zacks Rank #3 (Hold) stocks, we are optimistic about Starwood, Hyatt Hotels, Hilton Worldwide, Intercontinental Hotels Group plc (IHG) and La Quinta Holdings Inc. (LQ), given the momentum in their underlying businesses and optimistic outlook for 2015.

Bottom Line

We believe that the dark days are over for the lodging sector which is now a worthy investment proposition for 2016 provided the economic recovery and the low supply-high demand scenario continue. Although risks are easing out, near-term concerns related to a moderately sluggish recovery in certain pockets of the world remain the overhangs.

Thus, there are plenty of reasons to be optimistic about the hotel industry for the long haul. But what 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 this important sector of the economy now.

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