Four hotel stocks with room to grow

However, there appears to be an odd disconnect between the industry outlook and stock performance. While the growth in revenues per available room (revpar) and occupancy rates (OR) have overtaken the peaks of the pre-housing crisis period, the Baird/STR hotel index has lost nearly 18% on a yearly basis, as of June 27, 2016.

This presents an attractive buying opportunity for investors looking for a lodging market play. The leading constituents in the global hospitality market are well positioned to take advantage of the industry trends and the increasing presence of the millennial travellers through lifestyle offerings. These companies are constantly expanding their geographic footprint with an eye on the rapidly growing emerging markets slice of the pie. Sustainable brand advantage, healthy revenue boosted by recurring managed and franchised fees and surging demand put them in a commanding position in an industry poised for multi-year growth, according to Morningstar equity research.

A global operator and franchisor of hotels,  Marriott (MAR) owns 19 brands including Marriott and Courtyard as well as newer lifestyle brands Autograph and Moxy. The company is due to close a US$13.6-billion deal this year to acquire another hotel giant,  Starwood Hotels (HOT), creating world's largest hotel chain. The combined entity will operate 1.1 million rooms across 30 brands ranging from the upscale to luxury segments.

"We see the acquisition of Starwood strengthening Marriott's brand advantage, as Starwood's global luxury portfolio complements Marriott's dominant upper-scale position in North America," said Morningstar equity analyst Dan Wasiolek in a report.

Marriott is a nimble player in a fast-evolving marketplace. The company has added new brands, renovated core Marriott and Courtyard properties in the past few years, while growing technology integration and loyalty members. "These actions have led to share gains and a strong positioning with millennial travellers," said Wasiolek, who recently raised the stock's value from US$71 to US$73.

With 98% of its 768,000 rooms managed or franchised, Marriott has an attractive recurring-fee business model with high return on invested capital (ROIC). "Over the next five years, the firm will have healthy adjusted ROICs, expanding margins and accelerating room growth," said Wasiolek, who forecasted annual room growth of 4.9% over the next decade.

 InterContinental Hotels (IHG) owns and operates 10 brands including Holiday Inn and Holiday Inn Express and newer lifestyle luxury brands including Hotel Indigo, Even and Kimpton. Managed and franchised represent 99.5% of the 742,000 rooms it operates. Americas represents 64% of total rooms, followed by Europe (14%) and China (12%).

The company's current 5% share of global hotel rooms is set to increase as it controls 13% of all industry pipeline rooms, said a Morningstar report, which forecasted near mid-single-digits room growth over the next decade, "above the firm's low-single-digit growth of the past few years."

Wasiolek says InterContinental is well positioned for market share gains based on "revenue per available room and unit growth for the company's Americas, Europe, AMEA (Asia, Middle-East and Africa) and Greater China regions."

The firm's significant exposure to higher-margin and less-capital-intensive franchise and managed properties results in higher relative ROIC. Wasiolek projected the return on invested capital to average 72% for the next five years, and operating margins to expand from 37.7% in 2015 to 40.6% in 2025.

InterContinental also has one of the strongest online presences and loyalty programs in the industry. "Its digital revenue is 20% of total room revenue and increasing by 10%," said Wasiolek, who put the stock's worth at US$44.

The world's largest hotel company by number of properties (7,834),  Wyndham Worldwide (WYN) owns and operates vacation rentals, resorts and a vacation exchange platform with 3.8 million members. It's leading brands Ramada, Super 8, Days Inn and Howard Johnson make up 70% of its hotel rooms.

"During the past several decades, Wyndham Worldwide has established a leading presence in its lodging (23% of revenue), vacation ownership (51%) and vacation exchange and rental (28%) segments, creating a brand intangible advantage across the entire business," Wasiolek said in a Morningstar report.

The company derives 63% of its revenue from service-for-fee segments--lodging, vacation exchange and rental, and time-share management--which are less capital-intensive and higher-margin than owned assets, said Wasiolek, who forecasted ROIC to average 10% over the next five years.

Wyndham's 112,000 managed vacation properties and 203 resorts make it the largest manager in the world in both segments. "The value of the brand is further supported by its 9% share of North American rooms and by one of the industry's largest loyalty programs (22 million active members)," said Wasiolek, who determined the stock is worth US$76, implying a 2016 EBITDA of 10 times, and annual lodging sales growth of 4.2% over the next decade.

The hotel operators recently revised its 2016 revenue forecast from US$5.8 billion to US$5.98 billion and boosted its quarterly dividend from 42 cents per share to 50 cents, or 19%, after posting a 5% revenue growth in 2015.

A global chain of hotels,  Hilton (HLT) operates 765,000 rooms across 13 brands serving the midscale through luxury segments. Hampton and Hilton are the two largest brands. Geographically, Americas represents 80% of total rooms, while Asia Pacific (7%), Europe (10%) and Africa, Middle East and Asia (3%) make up the rest.

The firm's room expansion is expected to be among the industry's fastest. "Hilton's current 5% share of hotel industry room is set to increase, as the company controls 19% of the rooms in the global hotel industry pipeline," said a Morningstar report.

Hilton plans to spin out a majority portion of its owned assets (37% of total EBITDA in 2015), and its timeshare segment (12% of total EBITDA in 2015) by the end of 2016. "[This] should drive improved capital allocation, lower taxes and growth for those segments, leading to enhanced shareholder value," said Wasiolek, who estimates the stock's fair value to be US$23, incorporating annual room growth of 5.1% and annual revenue growth of 6.1% over the next 10 years.

In addition, Hilton has one of the larger loyalty programs in the industry. "The importance of the loyalty program is highlighted by over 50% of all room nights being booked by its [51 million] members," said Wasiolek.

Seeking to tap new market opportunities in Asia, the operator is rapidly bulking up its presence in emerging economies like India, Indonesia and, particularly, China where it plans to add 206 hotels, more than anywhere in Asia, over the coming years.

Complete access to Morningstar's research on equities, mutual funds and exchange-traded funds is available to subscribers to Morningstar Canada Premium.