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Coronavirus to Dampen Hotels & Motels Industry Prospects

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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 coronavirus outbreak, which has taken the shape of a global pandemic, is hurting the hotel industry. The outbreak has negatively impacted travel demand in China, North America and Europe. Hence, the travel industry is suffering the worst crisis in more than 18 years. Not only people are avoiding vacations but conferences are also being canceled. The industry’s bellwether Hilton Worldwide Holdings Inc. (HLT - Free Report) and Hyatt Hotels Corporation (H - Free Report) have withdrawn their guidance for 2020 due to the coronavirus impact. Moreover, another hotel behemoth, Marriott International, Inc. (MAR - Free Report) , announced that it will lose $25 million per month in first-quarter fee revenues due to the outbreak. The outbreak is likely to hurt the industry’s occupancy rate and RevPAR in the first quarter. However, President Trump said that he will reveal a plan to avert a recession. The plan will include a bailout for owners of hotels.
  • Moreover, higher costs remain a concern for the industry players. With an improvement in the economy and a 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.
  • Although the coronavirus outbreak is hurting the global market, the industry participants have been benefiting from several factors like strong domestic 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, demand for luxury hotels is on the rise.

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 #203, which places it in the bottom 20% 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 Dec 31, 2019, the industry’s earnings estimates for the current year have gone down 11%.

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 12.2% compared with the Zacks S&P 500 composite and the sector’s decrease of 2.6% and 11.8%, respectively.

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 13.72X compared with the S&P 500’s 11.04X. It is also above the sector’s trailing 12-month EV/EBITDA ratio of 10.21X.

Over the last five years, the industry has traded as high as 23.07X and as low as 10.99X, with the median being at 14.56X, as the chart below shows.

Bottom Line

The coronavirus will continue hurting the industry in the near term. Moreover, limited labor and higher costs are likely to continue acting as headwinds. However, in the long run, rising employment, higher real income and increased household net worth hold the key. Moreover, the industry participants will benefit from an increase in the number of luxury hotels.

Investors may retain the following three stocks for the time being, which currently 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 consensus mark in the trailing four quarters, the average positive surprise being 4.6%.

                                     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 preceding four quarters, the average positive surprise being 7.3%.

                                   Price and Consensus: WYND

Marriott International: The company is a leading worldwide hospitality company focused on lodging management and franchising. Its earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters and missed in the remaining one. The four-quarter beat is 2.9%, on average.

                                   Price and Consensus: MAR

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