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3 Hotels & Motels Stocks to Watch Despite Industry Headwinds

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The Zacks Hotels and Motels industry continues to bear the brunt of dismal RevPAR and occupancy rate. Moreover, the industry participants have been witnessing a sharp increase in expenses due to the coronavirus-induced shutdowns. Resurgence in coronavirus cases in several parts of the world raises further concern.

However, reopening of the economy and roll out of the COVID-19 vaccine have been fueling investor optimism. In fact, it is worth mentioning that industry players including Marriott International, Inc. (MAR - Free Report) , Hilton Worldwide Holdings Inc. (HLT - Free Report) and Hyatt Hotels Corporation (H - Free Report) have been gaining from reopening of the world economy.

Industry Description

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.

3 Trends Shaping the Future of Hotels & Motels Industry

Dismal Demand Hurts the Industry: The coronavirus outbreak has negatively impacted travel demand globally. 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. Most of the industry participants have also withdrawn guidance citing the virus outbreak. Per a STR report, RevPAR for 2020 witnessed a steep decline of 50.1%, while average daily rate (ADR) decreased 21.3%. Prior to the pandemic, STR had projected flat RevPAR for 2020 — the lowest prediction since recession of 2009. Demand and supply in 2020 declined 35.7% and 3.6%, respectively.

High Costs Remains a Woe: 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. Notably, the industry players have not only discontinued share repurchase activity but also suspended dividends in an effort to improve liquidity.

Reopening of Economy to Drive Growth: The industry has been gaining from reopening of economy. Per STR, occupancy for the week ended Mar 27 hit 57.9%, in sharp contrast to the industry’s historic low of 22% in mid-April. However, occupancy is still considerably below the pre-pandemic level. Occupancy, which was down 36.6% in 2020, is likely to increase 16.6% in 2021. Moreover, per STR, RevPAR, demand and supply in 2021 is anticipated to increase 21.6%, 18% and 5.4%, respectively. Meanwhile, increase in travel demand in China is benefiting the industry. With outbreak under sufficient control, domestic travel restrictions are being lifted, leading to an improvement in daily number of passenger flights in China. Moreover, businesses are picking up.

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 #207, which places it in the bottom 18% of the 253 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 Oct 31, 2020, the industry’s earnings estimates for the current year have gone down 37.6%.

Before we present a few stocks you may want to keep an eye on, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms S&P 500 & Sector

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

Over this period, the industry has increased 93.2% compared with the sector’s growth of 62%. Meanwhile, the Zacks S&P 500 composite has rallied 53.6% in the same time frame.

 

Hotels & Motels Industry’s Valuation

On the basis of the forward 12-month EV/EBITDA, which is a commonly used multiple for valuing Hotels and Motels stocks, the industry is currently trading at 18.29X compared with the S&P 500’s 17.21X. It is also above the sector’s trailing 12-month EV/EBITDA ratio of 11.44X.

Over the last five years, the industry has traded as high as 21.91X and as low as 9.06X, with the median being at 12.24X, as the chart below shows.

 

3 Hotels & Motels Stocks Trying To Survive the Industry Woes

Marriott International: Marriott is a leading worldwide hospitality company focused on lodging management and franchising. The company is consistently trying to expand presence worldwide. It plans to significantly broaden global portfolio of luxury and lifestyle brands in the days ahead. At the end of fourth-quarter 2020, Marriott's development pipeline had nearly 2,900 hotels, with more than 498,000 rooms. Further, nearly 229,000 rooms were under construction. Despite the coronavirus pandemic, the company added approximately 63,000 rooms globally. In 2021, the company anticipates net rooms growth of in the range of 3% to 3.5%.

Marriot currently carries a Zacks Rank #3 (Hold). In the past seven days, the Zacks Consensus Estimate for 2021 bottom line has remained stable. The company’s shares have gained 52.5% over the past six months.

                        Price and Consensus: MAR

Hilton: Hilton is a hospitality company that owns, leases, manages, develops, and franchises hotels and resorts. In a bid to maintain its position as the fastest-growing global hospitality company, the company is continuing to drive unit growth. As of Dec 31, 2020, Hilton's development pipeline comprised nearly 2,570 hotels, with roughly 397,000 rooms across 116 countries and territories — including 31 countries and territories where it currently does not have any running hotels. Moreover, 233,000 rooms in the development pipeline were located outside the United States and 204,000 rooms were under construction. During fourth-quarter 2020, the company signed several deals to expand its portfolio of resorts. Notably, this includes expansion agreements of Curio Collection in Mexico and Tapestry Collection in Portugal. It also launched the LXR brand in the United States, with the opening of Oceana Santa Monica.

Hilton currently carries a Zacks Rank #3. In the past seven days, the Zacks Consensus Estimate for 2021 earnings has remained stable. The company’s shares have rallied 36.7% over the past six months.

                          Price and Consensus: HLT

Hyatt: Hyatt aims to differentiate its brands from one another by providing distinct travel experiences. The company is also consistently trying to expand its presence globally and has expansion plans in Asia-Pacific, Europe, Africa, Middle East and Latin America. As the economy is opening up, signs of improvement can be noticed in greater parts of China. Moreover, the company stated that outside of China and South Korea, it is witnessing increase in demand in few markets albeit at a slower rate. Notably, in fourth-quarter 2020, occupancy level in Greater China was nearly 60%. Excluding Hong Kong, Macau and Taiwan, the occupancy levels were approximately 70%. The company anticipates RevPAR improvement in the second half of 2021.

Hyatt currently carries a Zacks Rank #3. In the past seven days, the Zacks Consensus Estimate for 2020 earnings has remained stable. The company’s shares have appreciated 49.9% over the past six months.

                         Price and Consensus: H

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Marriott International, Inc. (MAR) - free report >>

Hyatt Hotels Corporation (H) - free report >>

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