Major hotel companies should check in with strong first-quarter earnings, reflecting continued strength in the cyclical lodging recovery.

Businesses continue to loosen travel purse strings, while leisure travel demand remains firm. Both trends are allowing hotels to boost room rates, driving increases in revenue per available room, a key industry metric known as revpar.

"What's different in the lodging industry now from a year or two ago is the way business travel is booming, which shows up in midweek results," said Thomas Graves, equity analyst at Standard & Poor's. "In connection with the strength of business travel, this is one of the best environments for raising room rates in some time." (Graves has no ownership interest or business relationship with the companies he covers, although other parts of S&P may have relationships with them.)

Increased pricing power helped cause revpar to grow more than expected in the latest quarter. At U.S. hotels in general, revpar was up about 9% year over year, noted Robert LaFleur, an analyst at Susquehanna Financial Group. It gained even more -- around 10% -- at urban hotels. "Those numbers are very strong, if you look at the guidance the major companies gave," said LaFleur, who owns no shares of companies he covers and whose firm does no investment banking business.

Both

Marriott International

(MAR) - Get Report

and

Starwood Hotels & Resorts

(HOT)

predicted North American revpar would rise only 6% to 8% in the first quarter.

In particular markets, though, the unit revenue measure has grown more strongly, and that bodes particularly well for Marriott, Starwood and

Hilton Hotels

(HLT) - Get Report

. In New York, where all three operate large hotels, revpar is up more than 20%. In Marriott's home turf of Washington, D.C., it increased about 15%, while it swelled above 15% in Hawaii, an important Hilton market.

Against that backdrop, the companies are likely to improve their forecasts and could beat Wall Street estimates, said LaFleur.

"I think the recovery continues to unfold more strongly than people expected," he said. "I expect you're going to see another round of guidance increases this quarter by everybody."

Marriott earnings are up first, before the bell April 21. On average, analysts surveyed by Thomson First Call expect the company to report EPS of 56 cents, above Marriott's own forecast for 52 cents to 54 cents. The company logged first-quarter 2004 earnings of $114 million, or 46 cents a share.

Hilton follows on April 26, and the analyst consensus calls for EPS of 12 cents, compared with earnings of $37 million, or 10 cents a share, for last year's first quarter.

Starwood plans to report two days later, and analysts expect EPS of 31 cents a share, a penny higher than the company's own guidance. A year ago, Starwood earned $34 million, or 16 cents a share.

Analysts said they will be paying close attention to the companies' margins to see how strong revpar gains are offset by expenses.

"There will be a continued focus on margin flow-through," said LaFleur. "In a 10% revpar environment, is the operating leverage still there in the model? Does that revpar equate to 10% profit growth or 20% profit growth? Margins are one of the nagging issues related to the downturn that followed 9/11. They haven't come back as fast as some people might have expected."

Factors that could squeeze margins include employment costs, particularly health benefits, along with higher energy prices and the expense of outfitting hotel rooms with stylish new amenities like beds, duvets and pillows -- one of the latest trends.

A question about Starwood this time around is the impact expensing employee stock options will have on guidance. Marriott and Hilton have already rejigged guidance to account for options expensing, which is required under new accounting rules, but Starwood has not.

Companies must comply with the new rules by July 1, and Starwood executives have said the company will provide guidance for the change when it reports its first quarter.

The bottom-line impact is likely to be significant. In its latest annual regulatory filing, Starwood said 2004 EPS would have been $1.59 -- 25 cents less than the $1.84 it reported -- had it expensed options according to the new rules.

Last, investors and analysts will want more details about what the companies intend to do with the free cash flow they're generating. Fresh acquisitions are unlikely because hotel properties are far from cheap in the current market, says LaFleur. Another option would be paying down debt, but that's unlikely to be a top priority because major hoteliers spent the downturn that followed the Sept. 11 terrorist attacks firming up their balance sheets. That leaves companies the option of returning cash back to shareholders in the form of dividends or stock buybacks, moves that investors would welcome.