Staying in Hotels for the Summer

Despite the dawn of tougher comparisons next week, Raymond James boosted estimates on Starwood and Hilton on Friday, telling investors both companies are well-positioned for growth into 2004 and beyond. Elsewhere, Merrill Lynch boosted earnings estimates on Marriott, telling investors the demand for the company's hotel rooms would allow it to boost fees received from licensees.

Even Cogan, who said that hotel stocks have discounted a recovery into 2004 and beyond, thinks that second-quarter estimates will come up.

"Second-quarter comparison trends suggest company revpar guidance could be a bit low," said Cogan. "With only two weeks left in the quarter, our forecast that second-quarter 2004 [revpar at] all hotels and upper upscale could rise 9% and 10%, respectively, is looking likely."

And revpar gains in excess of 9% would come in toward the high end of expectations at most hotel operators. Marriott has said that revpar would grow between 7% and 9% for the quarter, while Host Marriott (HMT Quote) said it expected revpar growth between 5% and 7%. Starwood, which generates more revenue from upscale hotels, expects revpar to grow between 11% and 12%.

A big driver behind the outsized revpar gains is not only easy comparisons -- the economic recovery has sparked a return of business travel. Starwood, the first hotel operator to express optimism that the recovery was at hand when it released December earnings, is a good illustration of how powerful the cyclical turn in the hotel business can be.

A year ago, with the war, SARS festering overseas and a Fed hike far from investors' minds, Wall Street expected Starwood to earn around 80 cents in 2004 and $1.21 in 2005. But as business travelers began returning to Starwood's urban-centered hotels, analysts found they had low-balled Starwood's growth potential.

Today, the company's 2004 earnings are expected to come in at $1.27 a share, 58.5% higher than last year's estimate, while 2005 earnings are expected to come in at $1.61 a share, 33% higher than year-ago expectations. The rising expectations are a big reason why Starwood shares have doubled in the last 16 months.