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3 Hotels & Motels Stocks to Watch in a Promising Industry

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The Zacks Hotels and Motels is gradually getting out of the woods driven by reopening of economy and ramped-up vaccination process. People are feeling more optimistic and confident about the prospect of traveling again, courtesy of rapid pace of vaccinations. To capitalize on the sentiment, hotel operators are increasingly focusing on a number of initiatives to meet the needs of their customers as they return to hotels. Although occupancy is improving, it is still below the pre-pandemic level. Meanwhile, the spread of the highly contagious Delta variant remains a cause of concern for the industry. The industry players including Hilton Worldwide Holdings Inc. (HLT - Free Report) , Choice Hotels International, Inc. (CHH - Free Report) and Playa Hotels & Resorts N.V. (PLYA - 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. Some vacation ownership and exchange companies are also part of the industry. Some industry participants own, develop, and operate resorts. Companies like Civeo Corporation (CVEO - Free Report) develop lodges and villages; and mobile accommodations, which include modular, skid-mounted accommodation, as well as central amenities that provide long-term and temporary work force accommodations. Some of the industry players develop, market, sell, and manage vacation ownership and associated products. Few hoteliers also provide studios, one-bedroom suites, and accommodations to mid-market business and personal travelers.

4 Trends Shaping the Future of Hotels & Motels Industry

Reopening of Economy to Drive Growth: The industry has been gaining from reopening of economy. Per STR, occupancy for the week ended Jul 31 hit 70.1%, in sharp contrast to the industry’s historic low of 22% in mid-April 2020. However, occupancy is still below the pre-pandemic level. Per the same report, average daily rate (ADR) and RevPAR increased 6.8% and 0.1% compared to 2019, respectively, for weekly ended Jul, 31. According to STR‘s June 2021 monthly P&L data release, gross operating profit for U.S. hotels increased to 84% of the comparable 2019 level. Increase in travel demand in China is benefiting the industry. Businesses are also picking up.

Initiatives to Attract Customers: Firstly, hoteliers are focusing on comprehensive processes for cleaning, disinfection and infectious disease prevention. To this end, they have initiated a trained hygiene and well-being leader responsible for a clean and safe environment for staff and guests. Secondly, the companies have been making every effort to keep evolving their contactless experience and leveraged technologies such as mobile and web check-in as well as mobile key. The industry players have resorted to streamlining of operations with efficient management levels, the benefits of which are likely to remain even after pandemic fades out.

High Costs Remain 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 have been focusing on cost saving measures to counter the crisis. Employees in the industry are facing pay cuts, shortened working hours and furloughs. The industry playershave also discontinued share repurchase activity and suspended dividends in an effort to improve liquidity.

Delta Variant Poses a Threat: The Delta variant, which was first found in India, has been rapidly spreading to other parts of the world, increasing the risk of infections. The variant has now been found in 135 countries including the United States. The World Health Organization has warned that Delta will become the globally dominant variant of the coronavirus in the coming months. Consequently, the Delta variant remains a cause of concern as rising infections may trigger disruptions again, which might hurt the industry.

Zacks Industry Rank Indicates Bright Prospects

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

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. The Zacks Hotels and Motels industry currently carries a Zacks Industry Rank #147, which places it in the top 47% 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 gaining confidence in this group’s earnings growth potential. Since Jun 30, 2021, the industry’s earnings estimates for the current year have gone up 18.6%.

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 Underperforms S&P 500

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

Over this period, the industry has gained 32.2% compared with the sector’s growth of 17.8%. Meanwhile, the Zacks S&P 500 composite has rallied 38.5%.

One-Year Price Performance

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 77.88X compared with the S&P 500’s 16.21X. It is also above the sector’s trailing 12-month EV/EBITDA ratio of 13.53X.

Over the last five years, the industry has traded as high as 85.56X and as low as 9.3X, with the median being at 15.59X, as the chart below shows.

EV/EBITDA Ratio (F12M) Compared With S&P

3 Hotels & Motels Stocks to Watch Out For

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, it continues to drive unit growth. As of Jun 30, 2021, Hilton's development pipeline comprised nearly 2,590 hotels, with nearly 401,000 rooms across 115 countries and territories — including 30 countries and territories where it currently does not have any running hotels. It is to be noted that 247,000 rooms in the development pipeline were located outside the United States and 203,000 rooms were under construction. For 2021, the company expects net unit growth to be 5-5.5%. It anticipates net unit growth to remain in the mid-single-digit range for the upcoming years as well.

Hilton currently carries a Zacks Rank #3 (Hold). In the past seven days, the Zacks Consensus Estimate for 2021 earnings has been revised upward by 16.8%. The company’s shares have increased 12.5% over the past six months.

Price and Consensus: HLT

Choice Hotels: Choice Hotels, together with its subsidiaries, operates as a hotel franchisor worldwide. The company is highly reliant on expansion in both domestic and international markets. In 2020, the company awarded 427 domestic franchise agreements, out of which 70% accounted for conversion hotels. During first-quarter 2021, the company executed 89 domestic franchise agreements, out of which more than 80% were for conversion hotels.

Choice Hotels currently carries a Zacks Rank #2 (Buy). In the past 30 days, the Zacks Consensus Estimate for 2021 earnings has been revised upward by 3.6%. The company’s shares have appreciated 33.7% over the past year.

Price and Consensus: CHH

Playa Hotels & Resorts: Playa Hotels & Resorts together with its subsidiaries, owns, develops and operates resorts in prime beachfront locations in Mexico and the Caribbean. The fact that Mexico did not have any travel restrictions in place with respect to pre-flight COVID testing or mandatory quarantines for international tourists upon arrival is resulting in lesser consumer confusion compared with other destinations. This, in turn, has helped sustain business confidence during the reopening phase. Focus on direct booking channels enabled the company to ramp up occupancy faster than many third-party reliant competitors.

The consensus mark for its 2021 earnings indicates growth of 37.7% year over year. The company has a Zacks Rank #2.

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

Price and Consensus: PLYA

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