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Dismal Demand to Hurt Hotels & Motels Industry in 2020

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The Zacks Hotels and Motels industry comprises companies that own, lease, manage, develop and franchise hotels and resorts. Some vacation ownership and exchange companies are also part of the industry.

Let’s take a look at the industry’s three major themes:

  • The coronavirus outbreak has negatively impacted travel demand globally. Meanwhile, dominant industry players including Hilton Worldwide Holdings Inc. (HLT - Free Report) , Hyatt Hotels Corporation (H - Free Report) and Marriott International, Inc. (MAR - Free Report) have withdrawn guidance for 2020 citing the virus outbreak. The crisis will continue to hurt the industry’s occupancy rate and RevPAR in 2020. With meetings and conferences called off, business travelers grounded and leisure travelers forbidden to travel due to the pandemic, hotels worldwide have been witnessing booking cancellations and closures. Per a STR report, RevPAR for 2020 is anticipated to witness a steep decline of 50.6%, while average daily rate (ADR) is expected to fall 21.4%. Prior to the pandemic, STR had projected flat RevPAR for 2020 — the lowest prediction since recession of 2009. Demand for 2020 is likely to decline 36.2%. Per STR, occupancy will attain the 20-year historical average in 2023.
     
  • Moreover, higher costs remain a concern for the industry participants. Given that the ongoing coronavirus pandemic continues to impact the global travel industry, hoteliers are focusing on cost saving measures to counter the crisis. Employees in the industry are facing pay cuts, layoffs, shortened working hours and furloughs.
     
  • However, there are signs that the hotel industry is slowly regaining momentum. Per STR, the U.S. Hotel industry’s occupancy for the week ended Jul 4, 2020 has rebounded sharply from the historic lows in mid-April. Ever since, mid-April occupancy has increased for the 11 straight weeks. Per the report, the recent recovery can be attributed to increase in occupancy at freeway locations.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Hotels and Motels industry is grouped within the broader Consumer Discretionary sector.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. The Zacks Hotels and Motels industry currently carries a Zacks Industry Rank #149, which places it in the bottom 41% of the 252 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the top 50% of the Zacks-ranked industries is the result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since Jan 31, 2020, the industry’s earnings estimates for the current year have gone down 96.6%.

Before we present a few stocks you may want to hold in your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Underperforms S&P 500 & Sector

The Zacks Hotels and Motels industry has underperformed its own sector and the Zacks S&P 500 composite over the past year.

Over this period, the industry has declined 29% compared with the sector’s decrease of 6.4%. Meanwhile, the Zacks S&P 500 composite has rallied 6.5% in the same timeframe.

                                   One-Year Price Performance



Hotels & Motels Industry’s Valuation

On the basis of the trailing 12-month EV/EBITDA, which is a commonly used multiple for valuing Hotels and Motels stocks, the industry is currently trading at 13.45X compared with the S&P 500’s 11.84X. It is also above the sector’s trailing 12-month EV/EBITDA ratio of 10.34X.

Over the last five years, the industry has traded as high as 23.09X and as low as 9.3X, with the median being at 14.5X, as the chart below shows.



Bottom Line

The coronavirus will continue hurting the industry in the near term. Occupancy, RevPAR and ADR are likely to be down significantly in 2020. However, the industry is likely to gain momentum in the coming months as global economy is gradually reopening.

Investors interested in the industry may retain the following three stocks for the time being. Each of the three stocks carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Hilton Worldwide: The company owns, leases, manages, develops and franchises hotels and resorts. The company’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 19.4%.

                                       Price and Consensus: HLT



Wyndham Destinations, Inc. (WYND - Free Report) : The company operates as a vacation ownership and an exchange firm in the United States and worldwide. The company’s bottom line surpassed the consensus mark in the three of the trailing four quarters.

                                       Price and Consensus: WYND



Choice Hotels International, Inc. (CHH - Free Report) : The company is one of the largest hotel franchisors globally. Its earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 9.7%.

                                       Price and Consensus: CHH



5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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