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3 Hotel Stocks Likely to Beat Estimates in Q1 Earnings

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The U.S. hotel industry cycle appears to be moderating to historical norms coming off years of accelerated growth that started in 2010 following the recession. In fact, the outlook for the hotel industry this year too is no different with the players projected to experience continued but muted growth.

Meanwhile, the U.S. economy grew a paltry 0.7% in first-quarter 2017, down from 2.1% in fourth-quarter 2016. In fact, this marked the weakest pace of growth in three years as consumer spending hardly increased. However, this does not reflect the true picture of the economy's health as the overall economic sentiment remains reasonably bullish. Moreover, solid employment numbers and rising consumer confidence suggests that the sharp slowdown in consumer spending is most likely to be temporary.

We note that the hotel industry is particularly vulnerable to the ebbs and flows of economic conditions. So, despite the weak growth, improving economic indicators, solid lodging fundamentals, a steady rise in business and leisure travel, and strong investor appetite on the back of higher transaction volumes raise optimism for hoteliers.

However, uncertainty in the domestic and international markets continues to weigh on the U.S. lodging industry’s performance. In fact, higher costs, strengthening U.S. dollar and its impact on inbound, international travel along with pockets of geopolitical instability and economic slowdown are all expected to keep the industry’s growth at check. Moreover, negative sentiment related to travelling to and from the U.S. following President Donald Trump’s travel ban brings bad news for hotels, which play a crucial role in the travel supply chain.  Thus, on the whole, though industry-wide headwinds continue to weigh on sentiment, hoteliers are cautiously optimistic about this earnings season.

Q1 so Far

The Zacks categorized Hotels and Motels industry belongs to the broader Consumer Discretionary sector. Per the latest Earnings Preview, as of Apr 28, 42.9% of the Consumer Discretionary companies in the S&P 500 index have reported their results. Earnings and revenues for these companies have recorded year-over-year growth of 18.1% and 6.8%, respectively.  The beat ratio of 80.0% and 53.3% for earnings and revenues, respectively, is also noteworthy.

In fact, overall earnings for the sector in first-quarter 2017 are expected to be up 8.1% year over year and revenues are also likely to surge 11.3%.

Thus, with the broader Consumer Discretionary sector poised to come up with flying colors this earnings season, the hotel industry within the sector is also set to gain from the buoyancy.

So, let’s take a look at some companies in the Hotels and Motels space that have the potential to beat earnings in their upcoming first-quarter releases. In spite of the headwinds, these stocks are well positioned in today’s market environment. We believe, earnings beat should further help these stocks gain investor confidence, thereby paving the way for stock price appreciation.

How to Screen Likely Q1 Winners?
 
Picking the right stock for your portfolio could appear to be a daunting task given the wide range of companies in the hotel space. One way to confine the list of choices this earnings season is by looking at stocks that have a solid Zacks Rank accompanied by a favorable Earnings ESP.

Earnings ESP is our proprietary methodology for determining which stocks have the best chance to pull a surprise in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

The combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) along with a positive Earnings ESP is usually an indication of an earnings beat. You can see the complete list of today’s Zacks #1 Rank stocks here.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

3 Stocks to Invest in

For investors seeking to apply this strategy to their portfolio, below are the three hotel stocks that have the right combination of elements to deliver positive earnings surprises in their upcoming announcements:

Hilton Worldwide Holdings Inc. (HLT - Free Report) is engaged in the ownership, leasing, management, development and franchising of hotels, resorts and timeshare properties. The company’s geographic exposure, solid transient business as well as improving group business trends are expected to continue driving revenue per available room (RevPAR). Strong unit development and tremendous growth in loyalty program given Hilton’s scale, size, industry-leading brands and commercial platform also bode well.

Zacks Rank #3
Earnings ESP: +10.71%
Trailing four-quarter average earnings surprise: +2.52%
Expected Earnings Release Date: May 2

Red Lion Hotels Corporation is a hospitality and leisure company that owns, manages, and franchises hotels under its various brands primarily in the U.S. The company operates through three segments: Franchised Hotels, Company Operated Hotels, and Entertainment. Additionally, it promotes and presents entertainment productions under the WestCoast Entertainment name. Also, the company provides ticketing services under the TicketsWest name.

Zacks Rank #3
Earnings ESP: +3.33%
Trailing four-quarter average earnings surprise: +118.77%
Expected Earnings Release Date: May 8

La Quinta Holdings Inc. is an owner, operator and franchisor of select-service hotels in the U.S., primarily serving the midscale and upper-midscale segments. It provides franchise services to hotels in the U.S., Canada and Mexico under the La Quinta Inns & Suites and La Quinta Inn brands.

Zacks Rank #3
Earnings ESP: +50.00%
Expected Earnings Release Date: May 3

Bottom Line

Perked up investor confidence is sure to lead to greater demand, thereby boosting hoteliers’ profitability, making the lodging sector a worthy investment proposition in the near to medium term.

We believe that keeping an eye on these companies that have a potential of an earnings beat by virtue of their favorable Zacks Rank, positive earnings ESP and strong fundamentals could be a great idea for investors to tap into the optimism in this space.

Sell These Stocks. Now.

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