For Immediate Release
Chicago, IL – June 12, 2018 – Today, Zacks Equity Research discusses the Industry: Hotels, Part 1, including Booking.com (BKNG - Free Report) , Expedia Inc. (EXPE - Free Report) , TripAdvisor (TRIP - Free Report) , Hilton Worldwide Holdings Inc. (HLT - Free Report) and Marriott International, Inc. (MAR - Free Report) .
Industry: Hotels, Part 1
Stocks in the hotel industry are benefiting from growth in demand that supports increases in both occupancy and average daily rate (ADR). The momentum in the U.S. hotel industry continues in 2018 after moderate growth in 2017. In first-quarter 2018, the industry witnessed a better-than-expected rise in demand, with revenue per available room (RevPAR) increasing by 3.5%.
Consequently, stocks in the Hotels and Motels Industry have put on an impressive show in the past year, handily outperforming the broader market, as a reflection of this positive backdrop. The Zacks Hotels and Motels Industry has rallied 20.2%, surpassing the S&P 500 index’s gain of 14.5%.
The industry looks attractive, owing to rise in occupancy rate and gain in commercial transient demand. Further, we note that rising employment, higher real income and increased household net worth reinforced consumer confidence and sentiment. This has resulted in a steady rise in business and leisure travel, and higher transaction volumes, which are likely to continue.
The unemployment rate declined from 3.9% in April to 3.8% in May, the lowest in 18 years. The U6 unemployment rate, which includes people forced into part-time work and people sporadically looking for jobs, declined to 7.6%, the lowest level witnessed since May 2001.
Going forward, consumer and business spending are expected to keep the mood upbeat, suggesting that the U.S. economy will remain on solid footing in 2018. In fact, the Atlanta Federal Reserve’s GDPNow model forecasts healthy 4.8% (annualized rate) GDP growth in second-quarter 2018.
Numbers Look Impressive
A recent report by PricewaterhouseCoopers (PwC) shows that new supply is likely to rise 2% in 2018, up from 1.8% in 2017. This is likely to result in 0.3% increase in occupancy rates in 2018 to 66.3%. Moreover, ADR and RevPAR are projected to climb 2.6% and 3%, respectively this year. In 2019, the industry is likely to register ADR and RevPAR growth of 2.8% each.
Meanwhile, the Baird/STR Hotel Stock Index, which comprises 20 of the largest market capitalization hotel companies publicly traded on a U.S. exchange and attempts to characterize the performance of hotel stocks, rose 1.6% in April 2018. In fact, in a year, the index has gained 12.7%.
Additionally, according to Smith Travel Research (STR), a leading information and data provider for the lodging industry and Tourism Economics, U.S. hotels continue to witness robust improvement across all metrics. However, the report revealed that occupancy rate will decline in the fourth quarter of 2018 and in 2019 due to rise in demand post hurricane in 2017. Despite this, the industry will continue to report record performance due to robust industry fundamental.
Decline in International Travel a Concern
Fall in international travel in the recent times has been a major concern for the U.S. lodging industry. Moreover, negative sentiment related to traveling to and from the United States, given Trump administration’s stringent policies on immigration and tourism visas, is detrimental to hotels. If the U.S. dollar gains strength, this may keep industry growth in check, given its impact on inbound international travel.
Additionally, higher costs and increased supply along with pockets of geopolitical instability and economic slowdown are likely to be headwinds.
Meanwhile, hotel companies have been focusing on renovation, and digital and marketing initiatives to boost traffic and capitalize on growing tourism numbers. However, steep costs incurred by leading hotel companies to do so are taking a toll on profits. High labor costs will continue to be a major concern for hoteliers. In fact, online travel agents like Booking.com, Expedia Inc. and TripAdvisor are also limiting the pricing power of these brands.
Another major threat comes from home-sharing companies like Airbnb, Inc., which offer digital service, allowing travelers to book homes at holiday destinations. With lower overhead costs and far less regulations than what hotel companies have to comply with, these firms have made steady inroads into the industry and are grabbing share from giants like Hilton Worldwide Holdings Inc. and Marriott International, Inc.. Both companies currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Catalysts Driving Growth
The hotel industry is particularly vulnerable to the ebbs and flows of economic conditions. So the present solid economic fundamentals are likely to spur consumer spending in the remainder of 2018, raising optimism for hotel companies. Moreover, hotel companies will be able to counter any economic volatility better, if they keep moving from owning real estate to franchising their brands and services.
Also, these companies must look for ways to sustain their growth as online private accommodation aggregators flood the marketplace with new inventory. In fact, Marriott’s acquisition of Starwood Hotels & Resorts Worldwide Inc. was viewed as a move to combat the rising threat from online travel agents and home-sharing companies.
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