Rally in Hotel Stocks May Come Knocking
Hotel companies are doing everything right -- raising rates, filling rooms and boosting earnings guidance -- and yet shares continue to slide. A combination of economic anxiety and the outsized 2003 sector rally are to blame for recent underperformance, but the underlying fundamental trends are strong, and shares could be worth buying.
At the core of the bullish case is the fact that the hotel industry's recovery is switching gears, leading to higher profit margins and greater earnings growth in the second part of the year. During the first part of a recovery, hotels see occupancy rise as demand increases because of an improving economy. According to Smith Travel Research, an industry tracker, occupancy at all hotel rooms in the U.S. was 60%, with upscale hotels pushing closer to 70% -- the highest levels in two years.
"Fundamentally, the industry is sound. We're looking at seven weeks of double-digit growth in [revenue per available room]," said Jan Frietag, director at Smith Travel Research, noting the high occupancy rates. "What that implies is that hotels are full, and the next step, towards the end of 2004, is that we'll see an increase in room rate growth."
But as occupancy levels rise, filling rooms becomes more difficult and comparisons get tougher. That is happening now. Occupancy at all U.S. hotels during the week ended Aug. 7 rose just 1% year over year. With terror warnings, an uncertain economic outlook and InterActiveCorp (IACI), owner of Expedia, and Priceline.com (PCLN) guiding earnings expectations lower, investors are growing worried that hotel stocks are overvalued and industry fundamentals are peaking.This is why hotel stocks have fared so poorly over the last month. Since July 16, shares of Starwood Hotels (HOT) -- which has raised guidance for the last three quarters while easily beating analysts' earning estimates -- are off 9.5%. As shares slid recently, Wall Street was raising its earnings expectations, with 18 analysts raising 2004 forecasts by an average of 16 cents. Expectations for 2005 are up an average of 21 cents.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV