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A powerful cyclical recovery is lifting hotel earnings, prompting a near-daily parade of upward estimate revisions by analysts. The rally will face its first big test this summer, however, when year-over-year comparisons get tougher.

For much of 2004, hotel stocks have been red-hot as company executives have turned bullish on the prospects of a recovery. Occupancy rates have started to tick up, allowing operators to raise room rates. With year-ago results weak due to the war in Iraq, companies have posted double-digit percentage gains to revenue per available room, or "revpar," a key metric.

Indeed, in the week ending June 19, revpar at all U.S. hotels rose 5.4% with upper upscale revpar growth coming in at 7.3%, according to Smith Travel Research. In the same week a year earlier, revpar actually fell 1%, but next week, during the first full week of the summer travel season, these easy comparisons come to an end.

"Given stable and healthy leisure demand over the past couple of years, and a higher mix of leisure travel over the summer months, we believe comparisons could decelerate compared to high-single-digit/double-digit comparisons enjoyed throughout the spring of 2004," said Jeremy Cogan, analyst at Banc of America Securities, in a note.

With the Dow Jones Hotel Index up 12.6% year to date, driven by a 22.4% gain in industry front-runner

Starwood Hotels


, valuations are not necessarily cheap -- and investors may get skittish upon seeing smaller, steadier growth instead of the eye-popping numbers posted earlier this year.

That said, analyst ratings and earnings estimates continue to rise ahead of the release of second-quarter hotel earnings in mid-July. Two brokerages have upgraded

Marriott International

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in the last two weeks, with five analysts raising their 2004 estimates in the last month. Over the last 30 days, not a single analyst has reduced 2004 earnings expectations on Marriott,

Hilton Hotels

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Four Seasons

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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


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


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.

With the business travel recovery only now picking up steam, earnings estimates may well come up as hotels boost room rates and expand their operating margins. During the week ending June 19, Sunday through Thursday business travel was up 8.8%.

And in the coming months, rising occupancy rates will allow hotels to boost their average daily room rates, or ADR, even more than they already have.

"Business travel is recovering, group

sales should strengthen in the second half and bellwether cities like New York are going like gangbusters," said Marc Falcone, analyst at Deutsche Bank Securities. "The drive of revpar growth continues to shift to ADR from occupancy, a trend with positive profit implications."