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Vacations on Your Mind: Invest in Hotel Stocks?

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The hotel industry has been on the path of recovery for some time now, supported by stronger economic metrics and the increasingly positive employment scenario. Notably, despite economic and political upheaval in certain pockets around the world, demand remains strong and sales have been robust in the U.S. However, declining occupancy levels are a concern.

Nonetheless, on the brighter side, there are plenty of reasons to be optimistic about the broader hotel industry over both the short and the long term. Below, we discuss what investors can look forward to in the coming years:

Demand Exceeds Supply: The recovery in the broader economy has been a boon for the hotel industry as it has perked up leisure and transient business travel demand. According to Hyatt Hotels Corporation (H - Free Report) and Hilton Worldwide Holdings Inc. (HLT - Free Report) , the supply-demand environment in the U.S. is favorable as demand growth is better than supply, which is below the long-term average. This would lead to an increase in rates, thereby driving revenue per available room (RevPAR).

We note that demand growth in the U.S. has outpaced supply growth each year since 2010. Meanwhile, though the gap between demand growth and supply growth continues to narrow and occupancy growth has slowed, higher rates are expected to keep driving RevPAR. Moreover, in spite of the large pipeline of hotels, Smith Travel Research (STR) expects the sector’s demand growth in 2016 to be 2.1% in the U.S. with only 1.7% increase in supply.

International Expansion: Major hoteliers are exploring growth opportunities abroad, especially in the emerging markets and the outlying areas surrounding major cities. Despite the macroeconomic concerns in several of the emerging economies, hoteliers are forging ahead with expansion plans in markets with great long-term potential.

A number of U.S.-based hoteliers are targeting the unsaturated markets in Asia-Pacific, the Middle East, Brazil, Russia and Africa. Within Asia, China promises lucrative growth opportunities, despite the economic slowdown, with visits expected to increase substantially in the second half of 2016. In fact, the country is a major revenue contributor for both Starwood Hotels & Resorts Worldwide Inc. HOT and Marriott International, Inc. (MAR - Free Report) .

Apart from China, India is becoming a hot spot for U.S.-based hoteliers with its emergence as a global business hub. Although economic growth rates are slightly lower than China, the country has great long-term growth potential as a tourism market. Among others, Japan, Australia, Singapore and Thailand continue to attract travelers. Major players in the industry are also targeting the high-potential Middle East countries such as Turkey and United Arab Emirates (UAE) that offer strong infrastructure.

Meanwhile, growth in Brazil and Argentina continues to be sluggish, mainly due to economic slowdown in Latin America. However, Brazil is scheduled to host a mega sporting event -- the 2016 Summer Olympics in August -- which should boost tourism to a certain extent.

Meanwhile, Europe still remains an attractive market for hoteliers despite the repeated terror attacks and Brexit-induced uncertainties. Major players like Marriott, Hilton, and Wyndham Worldwide Corporation WYN have a strong foothold in this region.

Brand Renovation to Boost Growth: Hotel chains are meticulously working on guest satisfaction via brand conversion and re-modeling to gain a competitive advantage. Remodeling mostly involves restoration of lobbies and other public spaces, preservation of decorative features if possible, and guestroom upgrades to make the brand more relevant. In fact, brand perception is likely to have a growing influence on the mass market as well as the luxury space. With the market becoming increasingly saturated, especially the luxury segment, hotels will have to differentiate themselves.

Brands that can offer something uniquely compelling are likely to grab market share and thus the ability to innovate will be the key to success. Therefore, many leading hoteliers like Starwood, Marriott, Belmond Ltd. (BEL - Free Report) and Hyatt are firing on all cylinders to make their brands more relevant in today’s environment.

Moreover, in recent times, brand development is being shaped not only by economic trends, but also by millennials’ tastes. It is Gen Y that constitutes a major portion of the current tourism numbers who have a different horizon of expectation than their preceding generations. According to players in the hospitality sector, eco-awareness, wellness and brand distinctiveness are important themes for this generation.

Big hotel brands are thus launching more lifestyle hotels, which are mainly boutique brands that benefit from parent companies’ infrastructure. These include brands like Starwood’s Element and Aloft, Marriott’s Edition, Andaz by Hyatt and InterContinental Hotels Group’s (IHG - Free Report) Hotel Indigo.

Building Loyalty through Social Media and the Smartphone Technology: In today’s age of price comparisons and the increasing norm of a sharing economy, hotels have to constantly push their boundaries to retain customers. In this regard, digital innovation and social media are starting to play an increasingly important role in the hotel industry. Social media can enhance a brand’s prospects by connecting directly with guests, especially the millennials and can, in turn, increase loyalty and market share. Social media sites like Facebook, Inc. (FB - Free Report) , Twitter, Inc. (TWTR - Free Report) and TripAdvisor Inc. (TRIP - Free Report) are commonly used by travelers select hotels.

Moreover, hoteliers are using apps to help guests manage bookings and are offering interactive maps/GPS as well as reward programs to increase occupancy. Being tech savvy is thus no longer an option but a necessity to survive in the intensely competitive hotel industry.

In fact, according to Navis, a leading innovative hospitality technology solution provider -- which quoted eMarketer's latest estimates of digital and travel research and booking -- 51.8% of travelers who book trips digitally in 2016 will do so through a mobile device. This is a sharp uptick from 43.8% in 2015, and highlights the importance of smartphones in online travel.

Hoteliers are therefore looking to introduce responsive designs in their apps, one-click booking, and location technology to improve operating efficiencies and enhance guest services.

Many hotel companies are setting up analytics tools to understand consumer preferences -- and deliver a differentiated experience -- which could eventually motivate customers to visit frequently, stay longer and spend more. Loyalty programs are the key to better brand experience and hoteliers are continuously reengineering these to provide a more fulfilling experience.

Among the bullish hotel stocks we currently have Intrawest Resorts Holdings, Inc. SNOW, sporting a Zacks Rank #1 (Strong Buy) and Belmond (BEL - Free Report) , holding a Zacks Rank #2 (Buy).

Despite being Zacks Ranked #3 (Hold) stocks, we are also optimistic about Marriott Vacations Worldwide Corp. (VAC - Free Report) , Red Lion Hotels Corp. (RLH - Free Report) , China Lodging Group, Ltd. (HTHT - Free Report) and La Quinta Holdings Inc. LQ, given the momentum in their underlying businesses.

Bottom Line

An anticipated and typically strong summer for U.S. hotels is expected to drive profitability and boost investor confidence. In that case, the lodging sector will prove to be a worthy investment proposition for the second half of 2016 provided the economy shows signs of recovery, which it already is. However, concerns related to a moderately sluggish economy and political trouble elsewhere will remain as headwinds.

But there are plenty of reasons to be optimistic about the hotel industry over the long haul in an increasingly globalized world. Does this mean investing in the space right now is the right option?

Check out our latest Hotel Industry Outlook here for more on the current state of affairs in this market from an earnings perspective.

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