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Hotel Stocks Raise a Toast to Record Run Through 2019: 3 Picks

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A fresh round of forecasts last month spelt good news for the U.S. hotel industry. The space is widely expected to continue its record-breaking performance through 2019. Demand for hotel rooms is burgeoning, with revenue per available room (RevPAR) increasing at least 3% each year since 2010.

A strong economy bolstered by record consumer spending levels was cited as the primary reason for the impressive performance. Such encouraging factors will help the hotel industry gain traction in the near future, while GOP tax cuts will spur an increase in leisure as well as hotel development. Given the positives, doubling down on the hottest hotel stocks seems judicious.

U.S. Hotel Forecasts Bright

As per hotel research firm STR and Tourism Economics latest report, the hotel industry is projected to see a 0.6% rise in occupancy to 66.3% in 2018. Average daily rate (ADR) and RevPAR are expected to rise 2.6% to $129.85 and 3.2% to $86.09.

The luxury segment will witness the largest increase in occupancy (0.9%), ADR (3%) and RevPAR (3.9%). By the way, all the other segments are also expected to post considerable growth in occupancy, ADR and RevPAR.

Among the 25 markets surveyed, 22 of them are projected to report RevPAR growth this year. While majority of them are expected to see growth in the range of 0% to 5%, Minneapolis/St. Paul, Minnesota-Wisconsin, and Miami/Hialeah, Florida are projected in the range of 5% and 10%.

As per the report’s forecast for 2019, the hotel industry is projected to report a 0.2% increase in occupancy to 66.4%, 2.4% growth in ADR to $132.97 and 2.6% rise in RevPAR to $88.29. RevPAR is expected to be the maximum at the Independent segment (2.5%). In comparison to 2018, all markets are expected to post growth between 0% and 5%, except for Minneapolis, next year.

All the three key metrics are poised to scale north this year and the next as demand continues to outpace supply.

Source: STR/Tourism Economics

Stronger GDP — A Key Catalyst

The hotel industry is in a solid position moving through the next year, particularly due to a stronger economy. According to the Commerce Department, gross domestic product (GDP) increased at an annualized rate of 4.2% in the April-June quarter. This was slightly higher than the initial 4.1% read and also the strongest since a 4.3% annual gain in the third quarter of 2014. On the whole, the economy expanded 3.2% in the first half of this year and is on track to hit the Trump administration’s annual growth target of 3%.

Gross domestic income (GDI), an alternative measure of economic growth, also increased at a 1.8% annualized rate in the second quarter. Thus, the average of GDP and GDI, also known as the gross domestic output and considered to be a better measure of economic activity, expanded at an encouraging rate of 3% in the April-June quarter.

 Americans, in fact, haven’t been this confident about the economy in 18 years. Consumers’ assessment of current conditions improved and expectations about the future strengthened largely due to a healthy labor market. As per the Conference Board, the consumer confidence index climbed to 133.4 in August from a revised 127.9 in July. The key economic indicator that measures attitudes on future economic prospects reached the highest level since October 2000 and surpassed the post-recession high of 130 scaled this February.

Tax Cuts Helping Hotel Industry

The GOP tax cuts are a blessing in disguise for the hotel industry. Trump’s tax plan reduced individual tax rates considerably. The tax cut got implemented this year, instead of being delayed until 2019.

On an individual level, tax cuts will boost the paychecks for many workers and will result in higher discretionary income for leisure travel. This in turn will boost revenues for hoteliers. Major hotels, in the meantime, will advantage from the corporate tax cut and spend the extra money on business development and growth in America.

3 Solid Buys

It will, therefore, be prudent to invest in fundamentally sound hotel stocks that can make the most of the bullish run. We have, thus, selected three such companies that carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Red Lion Hotels Corporation (RLH - Free Report) operates as a hospitality and leisure company the United States. It operates in two segments, Company Operated Hotels and Franchised Hotels. The company owns, manages, and franchises upscale, midscale, and economy hotels. In the last 60 days, one earnings estimate moved north, while none moved south for the next year. The Zacks Consensus Estimate for earnings soared 57.1% in the same period.

Wyndham Destinations, Inc. (WYND - Free Report) operates as a hospitality company. It offers hotel management and vacation exchange and rental services. In the last 60 days, five earnings estimates moved north, while one moved south for the next year. The Zacks Consensus Estimate for earnings rose 2.1% in the same period.

Vail Resorts, Inc. (MTN - Free Report) operates through three segments: Mountain, Lodging, and Real Estate. The Lodging segment owns and/or manages various luxury hotels and condominiums under the RockResorts brand, and other lodging properties. In the last 60 days, one earnings estimate moved north, while none moved south for the next year. The Zacks Consensus Estimate for earnings advanced 0.2% in the same period.

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