Hotel Stocks Showing Weakness

Hotel operating metrics continue to slide, and lodging company share prices have begun to show some weakness after months of resiliency.

According to data released from Smith Travel Research, Inc., average weekly occupancy fell 10.1% last week, while average daily room rate, or ADR, fell 9.4% versus the year-ago period.

Together, this resulted in a 18.6% year-over-year decline in revenue per available room, or RevPAR, a key hotel industry operating metric.

The declines in room rate remain particularly troubling, as companies attempt to fill rooms by lowering prices. Ultimately, we believe that this strategy will increase both the severity and length of the industry's downturn.

Hotel stocks had remained resilient over recent months in spite of the ongoing streak of bleak operating statistics reported thus far this year. However, the shares have pulled back in recent days.

Over the last two weeks, shares of Starwood Hotels & Resorts (HOT - Analyst Report) have fallen more than 18%, while shares of Marriott International (MAR - Analyst Report) have declined nearly 15%. This compares to a decline in the S&P 500 Index of just under 5% over the same time period.

We continue to believe that investors in lodging stocks have been overly optimistic regarding the chances of a second-half recovery in operating fundamentals. While we acknowledge that the year-over-year comparisons will likely improve in the back half of the year, we expect that the change will simply reflect the poor performance in the second-half of 2008, rather than a material improvement in current conditions.

In light of the significant room discounting currently underway in the industry, we anticipate that the present downturn in operating fundamentals will persist longer than is generally expected by many lodging industry investors. As such, we believe that hotel company shares will continue to decline in the near-term.

We maintain our negative outlook on the group, and reiterate our Sell ratings on both Starwood and Marriott.