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U.S. Hotel Industry Outlook - February 2018

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The year 2017 favored the U.S. hotel industry with moderate demand growth supporting increases in both occupancy and average daily rate (ADR).As a result, revenue per available room (RevPAR) witnessed a rise of 3% over 2016.

This is further reflected in the industry’s stock-price performance. Over the past year, the Zacks Hotels and Motels Industry has fared better than the broader S&P 500 index. While the industry has gained 38.4%, the broader index has added only 16.7%.

With fourth-quarter gross domestic product (GDP) growth remaining decent at 2.6%, the economy expanded at an annual rate of 2.3%, better than the 1.5% growth rate recorded in 2016. We note that rising employment, higher real income, and increased household net worth reinforced consumer confidence and sentiment. This has resulted in a steady rise in business and leisure travel, and higher transaction volumes, which are likely to continue.

Going forward, consumer and business spending are expected to keep the mood upbeat, suggesting that the U.S. economy will remain on solid footing for 2018. In fact, the Atlanta Federal Reserve’s GDPNow model forecasts healthy 3.2% (annualized rate) GDP growth in first-quarter 2018.

However, peaking supply continues to be a meaningful downside risk and is expected to put pressure on the pricing power, thereby tempering the performance somewhat.

Number Crunching

Statistics underscore the expectation of moderating yet positiveperformance by the hotel industry. A recent report by PricewaterhouseCoopers (PwC) shows that new supply is likely to rise 1.9% in 2018, flat with 2017. This is likely to result in a 0.1% decline in occupancy rates in 2018 to 65.5%.Though ADRand RevPAR are projected to climb 2.1% and 2%, respectively this year, the rate of increase will be less than the average growth recorded in the past few years.

Meanwhile, the Baird/STR Hotel Stock Index, which comprises 20 of the largest market capitalization hotel companies publicly traded on a U.S. exchange and attempts to characterize the performance of hotel stocks, rose 3.3% in December 2017. In fact, year to date, the index is up 32%. Higher interest rates, tax reform and hurricane-related demand tailwinds aided the outperformance.

Additionally, according to Smith Travel Research (STR), a leading information and data provider for the lodging industry and Tourism Economics, U.S. hotels continue to witness robust improvement across all metrics. While overall occupancy at U.S. hotels was up 1.4% year over year for the week ended Feb 3, 2018, ADR rose 2.2%. Resultantly, RevPAR grew 3.6% in the same time frame.

Ongoing Obstacles

Uncertainty, both international and domestic, may continue to weigh on the performance of the U.S. lodging industry.  Moreover, negative sentiment related to traveling to and from the United States given the Trump administration’s stringent policies on immigration and tourism visasis detrimental to hotels.

While the anticipated weakening of U.S. dollar could boost inbound international travel, it would then have a negative impact on domestic consumer spending, forcing consumers to shift discretionary spending.Additionally, higher costs and increased supply along with pockets of geopolitical instability and economic slowdown are likely to continue to pose  headwinds.

Meanwhile, hoteliers have been focusing on renovation, and digital and marketing initiatives to boost traffic and capitalize on growing tourism numbers. However, to do so, steep costs incurred by leading hoteliers are taking a toll on profits. Moreover, high labor costs will continue to be a major concern for hoteliers, and as they won’t be able to boost ADRs as much as they would like, their profits may be dented further. In fact, online travel agents like The Priceline Group Inc. PCLN, Expedia Inc. (EXPE - Free Report) and TripAdvisor (TRIP - Free Report) are also limiting the pricing power of these brands.

Another major threat comes from home-sharing companies, like Airbnb, Inc., which offer digital service allowing travelers to book homes at holiday destinations. With lower overhead costs and far less regulations than what hotel companies have to comply with, these firms have made steady inroads into the industry and are grabbing share from giants like Hilton Worldwide Holdings Inc. (HLT - Free Report) and Marriott International, Inc. (MAR - Free Report) . Notably, both companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Potential Growth Drivers

The hotel industry is particularly vulnerable to the ebbs and flows of economic conditions. So the present solid economic fundamentals that are likely to continue spurring consumer spending in 2018, raises optimism for hoteliers. Moreover, hoteliers will be able to counter any economic volatility better, if they keep moving from owning real estate to franchising their brands and services.

Also, hoteliers must look for ways to sustain their growth as online private accommodation aggregators flood the marketplace with new inventory. In fact, Marriott’s acquisition of Starwood Hotels & Resorts Worldwide Inc. was being viewed as a move to combat the rising threat from online travel agents and home-sharing companies. Other hoteliers like Hyatt Hotels Corp. (H - Free Report) and Wyndham Worldwide Corp. WYN are also investing in home-sharing start-ups to combat Airbnb.

In 2017, the hotel industry proved to be resilient to the marketplace shift. Going forward, too, the industry is expected to witness continued success.

Thus, as hoteliers strive to enhance value and competitiveness, industry-best practices such as sustainability, brand refreshment and increased visibility through technological innovation and social networking, especially among millennials, will remain the priorities. Acute, focused investment in infrastructure to attract more business and leisure travelers will also hold the key to growth.

Zacks Industry Rank

Within the Zacks Industry classification, hotel companies are broadly grouped under the Consumer Discretionary sector (one of the 16 Zacks sectors).

We rank 265 industries into 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. We put our X industries into two groups: the top half (industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).

In fact, ourback-testing shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. Over the last 10 years, using a one-week rebalance, the top half beat the bottom half by more than twice as much. The Zacks Industry Rank for Hotels & Motels industryis currently #86 (top 32%).

The ranking is available on the Zacks Industry Rank page.

Earnings Trends

So far, the fourth-quarter 2017 financial performance for hoteliers has been encouraging. While Hilton, Hyatt and Marriott surpassed the Zacks Consensus Estimate for earnings and revenues, Wyndham beat the consensus mark for earnings but missed on revenues marginally.

The Hotels & Motels industry falls under the broader Consumer Discretionary sector. If we look at the overall results of the sector, earnings grew 0.9% in the September quarter while total revenues rose 3.5%.  Meanwhile, for the December quarter, though revenues are expected to rise 4.2%, earnings are projected to record a decline of 0.5%. For more details about earnings for this sector and others, please read our Earnings Preview.

Conclusion

The U.S. hotel industry has been benefiting from several factors like a strong economy, higher income, increased consumer confidence and a strong labor market. As people are steadfast on spending time with loved ones and keep looking for unique experiences at all price points, companies in the space believe that their diverse portfolio of offerings can continue to deliver on this growing demand.

Consumer spending is expected to rise through 2018 backed by a favorable economic scenario. This raises optimism for companies in the leisure and recreation space. GDP grew at a seasonally adjusted annual rate of 2.6% in the fourth quarter of 2017, following gains of more than 3% in the previous two quarters, per the “advance” estimate released by the Bureau of Economic Analysis.

This marked the economy’s strongest stretch of growth since the expansion started in mid-2009. Improving economic indicators bode well for the industry as these lead to an increase in leisure and business travel demand.

Meanwhile, consumer spending, the main engine of the economy, grew 3.8% in the fourth quarter after a 2.2% gain in the third. Again, there was a marked improvement in the Consumer Confidence Index in January, after a setback in December. Consumer Confidence rose 2.3 points to 125.4 in January. The momentum is expected to continue through 2018.

Thus, we see no reason why the industry should not continue to enjoy gains on both the top and the bottom lines in the near-to-middle term, especially when the unemployment rate is at a 17-year low and wages are growing at the quickest pace since the end of the last decade.

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