Hotel Sector Strong

The rally in hotel stocks has sputtered in recent weeks, but it still may be too early to check out of the sector.

At the very least, the stocks should be able to return to recent highs, market watchers say. The industry's cyclical recovery is far from over, with business travel on the rise and leisure demand remaining strong. Those trends will allow hotels to continue to boost room rates, offsetting potential inflationary pressures such as higher energy costs, factors cited for recent investor skittishness.

"We've seen expense inflation, but we haven't seen inflation in the top line or pricing power," said Asad Kazim, vice president at RReef Funds, a unit of Deutsche Bank Real Estate. "Now we're starting to see pricing power. That ought to mitigate any expense inflation."

Stocks of large hotel companies have retreated recently from 52-week highs. Along with concerns about hotel-expense inflation, worries that higher gas prices might temper travel demand have weighed on the stocks. Some investors also may have worried that multiples were getting too dizzy, as enterprise value reached about 12 times earnings before interest, taxes, depreciation and amortization, or EBITDA. Such multiples are at the high end of the companies' historical ranges.

Nevertheless, Kazim and many analysts contend the recovery is far from over. They point to recent bullish revenue trends. A key metric for the industry is revenue per available room, or revpar. So far this year, it's up almost 10% at upper-upscale hotels, according to Smith Travel Research, an industry research firm. The upper-upscale category includes key brands for Hilton Hotels (HLT), Marriott International (MAR) and Starwood Hotels & Resorts (HOT). The revpar numbers are bullish, according to Kazim, given that Starwood and Marriott forecast first-quarter North American revpar growth of 6% to 8%.

RReef owns shares of Hilton, Starwood, La Quinta (LQI), Host Marriott (HMT) and Sunstone Hotel Investors (SHO).