Steady as she goes.
That's the conventional wisdom for the rest of the year regarding large hotel companies and casino operators, which -- Thursday's events notwithstanding -- have been riding robust cyclical recoveries that should yield solid second-quarter results.
Business and leisure travelers continue to check into hotels, keeping occupancy levels high and enabling hoteliers to lift room rates and bolster profits. And with the supply of new hotel rooms expected to remain low over the next couple of years, room rates should continue to rise.
At the same time, gamblers, vacationers and conventioneers continue to flock to the key gaming market of Las Vegas, benefiting large casino companies, like
, that have flagship properties there.
That said, some investors have grown jittery about a potential slowdown in Las Vegas in the second half of the year. Bear Stearns analyst Joseph Greff last week downgraded MGM Mirage shares, saying growth in room rates in Las Vegas appears to be decelerating.
As always for the lodging and gaming sectors, key variables remain the economy and the potential that terrorist attacks could disrupt or discourage travel. A sharp economic downturn could curtail business travel spending and cause consumers to cut back on vacations and casino visits.
The deadly rush-hour bomb blasts in London pressured hotel stocks Thursday. But analysts said the apparent terrorist attacks likely won't have a significant long-term impact on U.S. hoteliers. They estimate these companies derive a small portion of operating profits -- 4% or less -- from U.K. hotels. They also note lodging stocks bounced back after previous disruptions like the March 11, 2004, Madrid train bombings.
Second-quarter results, which start trickling out this month, should provide a good indication of general trends likely to continue through the rest of the year.
"Particularly for the hotels, the second quarter should be good," says Thomas Graves, an equity analyst at Standard & Poor's. "Profitability should be helped by higher room rates. Those tend to flow more to the bottom line, whereas higher occupancy can have incremental costs associated with it."
Big casino operators Harrah's and MGM Mirage should also report significant profits.
Sifting through their earnings reports could prove a little tricky this time around, however. Graves notes that both companies recently completed blockbuster mergers, and analysts will want to exclude one-time merger costs from earnings. In addition, it's too soon for earnings to reflect all of the benefits the mergers may bring. (Graves doesn't own shares or have any affiliation with companies he covers.)
Harrah's $6.8 billion purchase of Caesars Entertainment closed last month, after the April closing of MGM Mirage's $7.9 billion acquisition of Mandalay Resort Group.
For the hoteliers, a key measure of industry health has been giving off bullish readings. Revenue per available room, or revpar, has risen 8.9% at U.S. hotels from the beginning of the second quarter through June 25, vs. the same period a year ago, according to Bear Stearns' Greff, who based his calculations on weekly data from Smith Travel Research. (Bear Stearns does and seeks to do business with companies covered in its research reports.)
The revpar figure is in line with the higher guidance that
provided when they reported first-quarter results.
But revpar has been increasing at a faster clip in major urban markets such as New York, Chicago and Los Angeles, Greff notes. It's also been growing more briskly at luxury and upper-upscale hotels. Both trends bode well for Hilton, Marriott and
Starwood Hotels & Resorts
, which have significant exposure to urban and higher-end markets.
Greff estimates that revpar in Hilton's and Starwood's markets grew 12.8% and 13.7% year over year, respectively.
Matthew Quinn, senior lodging analyst at Zack's Investment Research, expects that strong revpar will allow Marriott and Starwood to hit the consensus analyst estimates for earnings per share of 77 cents and 65 cents, respectively. For Hilton, he's predicting EPS of 25 cents, a penny above the Thomson First Call consensus. (Quinn owns no shares of companies he covers, and Zack's does no business with them.)
"I don't think there's a lot of upside beyond my estimates," Quinn says. "People will be more interested in what the companies say for the remainder of the year. If they continue to increase EBITDA
earnings before interest, taxes, depreciation and amortization and revpar guidance, people will like that."
Increasing guidance has been the general trend for hoteliers in recent quarters. Leisure travel has remained strong, and the resurgence of business travel has been a key growth driver, S&P's Graves says.
Marriott plans to report its second quarter on July 14, followed by Starwood on July 26 and Hilton on July 27.
For the big casino operators, the second quarter should shape up well. Business in Las Vegas remains strong, and Morningstar analyst Sanjay Ayer notes that some other markets that are important for Harrah's, such as Louisiana, have done well.
On average, analysts expect MGM Mirage to report earnings of 43 cents a share when it reports July 28, according to Thomson First Call. When it reported its first quarter, MGM offered second-quarter EPS guidance of 70 cents to 75 cents, but that excluded the impact of the Mandalay merger and was before the company's 2-for-1 stock split in May.
Harrah's plans to report on Aug. 4, and the analyst consensus is for a profit of 93 cents per share. That compares with adjusted earnings of 79 cents a year ago.
In light of the debate about whether room rates at Las Vegas casinos will decelerate in the second half of this year, investors may be more focused on any hints the two companies offer about future bookings. MGM Mirage offered forward guidance when it reported its first quarter, but Harrah's, as usual, hasn't provided an outlook.
Greff recently stoked investor worries about the outlook for Sin City, saying his own surveys of future room rates pointed to a meaningful deceleration in July and August. He also expressed concern about convention growth in 2006.
Other analysts have countered by saying their own room-rate surveys don't point to a slowdown. Some have noted that predicting summer rates is tricky because convention business, which is often booked well in advance, slows in July and August. Leisure travel typically increases, but individuals tend to book rooms closer to when they visit, meaning surveys of future rates may not always include the impact of their visits.
Standard & Poor's Graves looks at another set of Las Vegas data -- casino winnings. Growth was 6% for the first four months of this year. That was down from the 12% rate for all of last year. And Graves notes that casinos face tough comparisons in some months later this year. Casino winnings in October 2004 were up about 20%, for example.
Still, growth should remain solid looking ahead, according to Graves. "My sense is that something like the opening of the Wynn resort in April drives more interest in the Las Vegas market," he says, referring to
new flagship property. "There may be some quarters or months where there's a slowdown, but overall, I see strength going forward."