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What Worries Shareholders in the Hotel Industry?

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Granted, sales have been pretty solid in the U.S. and emerging markets have great growth prospects. Still, it would be prudent to take a closer look at some of the dampeners before investing in the hotel industry. Particularly, macroeconomic concerns in several emerging economies could spoil the party for hoteliers.

Below, we discuss some of the headwinds that hotel stocks may face in the near as well as the long term.

Lingering Uncertainty in Certain International Markets: Despite immense growth potential, hoteliers are still apprehensive of several macroeconomic issues in international markets, like the social/political impact of the unexpected ‘’Brexit’’ vote and decelerating growth in certain parts of Asia.

Moreover, a sluggish economy in Brazil is weighing on demand in the Latin American region and has checked overall sales. In fact, Brazil, Argentina and Ecuador have witnessed a decline in hotel occupancy so far in 2016. The weak Latin American economy, aggravated by political turmoil thus led to softer tourism numbers in 2015, which continues in 2016.

Meanwhile, hoteliers like Marriott International, Inc. (MAR - Free Report) and Hilton Worldwide Holdings Inc. (HLT - Free Report) expect pandemic virus like Zika to continue to temper growth in the Caribbean region.

In Europe, economic/political conditions are expected to be challenging after U.K.’s exit from the 28-member economic bloc. Business in Europe is as it is clouded by economic uncertainties in the Northern region and deflation in the Eurozone.

Recent terror assaults on key European cities like London, Paris and Brussels have also affected tourism numbers. The attacks in Brussels dealt a severe blow to Europe’s tourism industry, just as it was going into the peak season with hopes of a turnaround from the canceled bookings that followed the Paris attacks last year. Further, concerns of further terror attacks and violence against foreign tourists are increasingly hurting trade in many African countries such as Kenya and Nigeria.

If this wasn’t enough, the slowing down of the Chinese economy and concerns over Japan, owing to a weaker yen and tax increases, are adding to hoteliers’ woes. Notably, China’s economic growth rate moderated in recent times with its 2015 GDP growth touching a 25-year low. The slowdown in the Chinese economy is thus hurting discretionary spending and, in turn, travel.

Meanwhile, the Middle East and Africa has seen a decline in international arrivals due to a drop in oil prices and increase in security concerns, political unrest and rising supply, adding to the woes of hoteliers.

Slowing RevPar Trends: Most of the hoteliers in the U.S. have been witnessing slowing revenue per available room (RevPAR) trends of late, because of continued muted international visitation along with new supply impact.

In fact, taking into account the impact of a weaker global macro outlook, Marriott lowered its comparable system-wide RevPAR expectations on a constant dollar basis to growth of 3% in North America, outside North America and worldwide for full-year 2016. Notably, the company had earlier guided for RevPAR growth of 3% to 5%.

Moreover, the majority of leading hoteliers expect soft demand in the oil producing regions, which mainly include parts of Texas, Houston, Louisiana, Houston, Oklahoma City and West Virginia to continue hurting RevPAR.

Fluctuation in Exchange Rates: Most of the major hoteliers like Marriott, Hyatt Hotels Corporation (H - Free Report) and Wyndham Worldwide Corporation (WYN - Free Report) generate a substantial portion of their revenues from customers outside the U.S. Notably, all these companies carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Hence, any unfavorable change in currency may hurt their financials to a great extent. Though the dollar weakened slightly in 2016 compared to the previous year, the negative currency impact is still significant. Meanwhile, Marriott and Wyndham are bearing the brunt of Venezuelan currency devaluation as well.

Thus, such volatility in exchange rates would continue to hurt the results of hoteliers as it has been doing so over the past few quarters.

Operating Margins Under Pressure: Operating margins for the hoteliers are yet to reach the industry peak of 2007 in the U.S. due to a spike in costs. Hoteliers are looking to differentiate themselves and keep up with changing consumer tastes through investments in technology, quick customer service and real-time marketing. These are denting margins even further. Additionally, most hoteliers plan to gain a competitive advantage and differentiate their brands through renovation. This comes at the cost of near-term margins.

Additionally, online booking sites like Expedia Inc. (EXPE - Free Report) and The Priceline Group’s PCLN are limiting the pricing power of these hotels, which are contracting their margins. The higher commission rates charged on hotels are also hurting margins. Meanwhile, with lower overhead costs and less stricter regulations than hotel companies, home sharing companies like Airbnb, Inc. are also seizing share away from traditional players.

Healthcare Reforms to Hurt Profitability: The Affordable Care Act, commonly known as Obamacare, is expected to have an adverse impact on hoteliers’ margins. The law entails hotels with 100 or more full-time equivalent employees to offer healthcare coverage to nearly all full-time employees and their dependents beginning this year. Also, from 2016, employers with 50 to 99 full-time-equivalent employees have also been included under Obamacare. Employers will be suffering penalties for any non-compliance. This would continue to raise costs for hoteliers in the near term.

To Conclude

Although various geopolitical & economic woes are threatening RevPar growth in the hotel industry, it remains to be seen whether improving economy and efforts undertaken by hoteliers to increase occupancy can offset these negatives.

Let us see how these companies fare and register profits in the coming days. In Vacation on Your Mind: How About Investing in Hotel Stocks?” we focused on the conditions which are expected to drive the industry forward.


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