Rally in Hotel Stocks May Come Knocking

"The good news is that the recovery continues apace -- third-quarter lodging company earnings expectations are likely to be met or exceeded, and fourth-quarter guidance appears conservative from most of the companies," said William Crow, analyst at Raymond James, noting later. "The recent selloff in lodging stocks has driven stock valuations to what is likely their lowest level in the past three years." (Raymond James does and seeks to do business with the companies covered in research reports.)

On the basis of Monday's closing stock price, Starwood was trading at 22.9 times 2005 earnings expectations -- lower than its five-year historical average of 28.3, according to Baseline. Marriott's price-to-2005 earnings ratio was 16.7 against its five-year average of 21.5, while Four Seasons' price-to-2005-earnings ratio was 31.9 against its five-year average of 46.2.

Not everyone, however, is convinced that hotel stocks are worth a buy. Jeremy Cogan, an analyst at Banc of America Securities, rates the sector at neutral because of the sector's big run in 2003, when the Dow Jones Hotel Index rose 50%. In his view, the huge gains have left stocks with limited upside potential, even now, and with the economic recovery once again appearing shaky, the risks and rewards are balanced.

"The lodging industry is very mature and tends to follow the lead of the broader U.S. economy," said Cogan. "Continued downward expectations of job growth, consumer spending [and] GDP could weigh on future earnings forecasts, and stocks we view as 'not exactly cheap' today could begin to look 'expensive.'" (Banc of America does and seeks to do business with the companies covered in research reports.)

With expectations on the rise and bullishness the de facto sector call, surprising the already optimistic mindset could become more difficult -- one reason why better-than-expected guidance and earnings have failed to inspire sector rallies. But with shares down more than 10% in some cases and fundamentals like occupancy and room rates moving in the right direction, even Cogan said the sector may be worth a second look -- if stocks continue to fall and the economic sluggishness abates.

"Should concerns about [the economy] prove to be short-lived, we could get more constructive on the shares, especially if they show a bit more weakness," he said.

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