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Dim Near-Term Prospects for Hotels & Motels Industry

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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 space.

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

  • The Hotels and Motels industry is likely to be driven by increase in occupancy and average daily rate (ADR). Per a STR (formerly known as Smith Travel Research) report, the U.S. hotel industry reported revenue per available room (RevPAR) and ADR growth of 0.7% and 0.8%, respectively, in third-quarter 2019. Moreover, occupancy rate in the third quarter was in the range of (0.1%) to 70.9%. The industry participants also witnessed rise in occupancy rate across all sectors from luxury to economy. The momentum is likely to continue for the balance of this year albeit at a slower rate. That’s because most of the hotel companies in the United States have been witnessing slowing RevPAR trends of late owing to muted international visits.
  • The industry participants have been benefiting from several factors like strong domestic economy, higher income, increased consumer confidence and strong labor market. As people are steadfast on spending time with loved ones and keep looking for unique experiences at all price points, demand for offerings is on the rise. Per GlobalData, luxury hotels in the United States are likely to increase to 1,067 by the end of 2019. By 2022, the figure is likely to increase to 1,123.
  • However, higher costs remain a concern for the industry players. With an improvement in the economy and drop in unemployment levels, industry players are struggling to control their largest operating expense — labor costs. Rising salaries, wages and benefits have been adding to labor costs.

Zacks Industry Rank Indicates Bright 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 #193, which places it in the bottom 24% of 254 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 a result of 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 Mar 31, 2019, the industry’s earnings estimate for the current year has gone down 2.2%.

Before we present a few stocks that you may want to consider for 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 improved 9.8% compared with the Zacks S&P 500 composite’s growth of 11% and the sector’s rally of 4.2%.

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 14.59X compared with the S&P 500’s 11.29X. It is also above the sector’s trailing 12-month EV/EBITDA ratio of 11.91X.

Over the last five years, the industry has traded as high as 22.86X and as low as 10.99X, with the median being at 14.31X, as the chart below shows.

Bottom Line

Rise in occupancy rate and commercial transient demand will continue to drive the industry in 2019. Further, we note that rising employment, higher real income and increased household net worth reinforced consumer confidence and sentiment. This resulted in steady rise in business and leisure travel, and higher transaction volumes, which are likely to continue in 2019 and beyond. Moreover, the industry participants will benefit from increase in the number of luxury hotels. However, limited labor and higher costs will continue to act as headwinds.

Below we have discussed one stock with a favorable Zacks Rank. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Civeo Corporation (CVEO - Free Report) : The company, which provides hospitality services to the natural resource industry in Canada, Australia, the United States, and internationally, sports a Zacks Rank #1 (Strong Buy). Moreover, the company’s earnings have surpassed the consensus estimate in three of the trailing four quarters, the average being 42.5%.

Price and Consensus: CVEO

Investors may retain the following three stocks for the time being, which currently carry a Zacks Rank #3 (Hold).

Hilton Worldwide Holdings Inc. (HLT - Free Report) : The company owns, leases, manages, develops, and franchises hotels and resorts. The company’s earnings beat the consensus estimates in the trailing four quarters, the average being 6.9%.

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 estimates in the preceding four quarters, the average being 7.2%.

Price and Consensus: WYND

Marriott International, Inc. (MAR - Free Report) : The company is a leading worldwide hospitality company focused on lodging management and franchising. The company’s earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters, the average being 9.5%.

Price and Consensus:MAR

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