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Hotel Stocks to Profit from Travel Rebound

The travel sector is 35% below pre-pandemic levels, which creates a long and visible growth runway for leading hotel chains.

Vikram Barhat 20 October, 2021 | 1:15AM
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Hotel 

As large parts of the global population get vaccinated and countries ease travel restrictions, the economic recovery continues to gather momentum. One of the biggest beneficiaries could be the global travel sector, particularly the hospitality industry.

Hospitality companies are well positioned for a windfall of revenue driven by pent-up demand among vacationers and businesses travellers. Bouncing back from the depths of the pandemic-led losses, the travel sector performance has already improved in 2021, is still 35% below pre-pandemic levels.

This creates a long and visible growth runway for leading hotel chains. With growing income levels in emerging markets, deepening of digital trends, and innovative offerings, the following dominant operators represent attractive prospects for investors looking to play the travel market rebound.

Wyndham Hotels & Resorts

 

Ticker

WH

 

Current yield:

115%

 

Forward P/E:

26.25

 

Price

US$82.87

 

Fair value:

US$70

 

Value

19% Premium

 

Moat

Narrow

 

Moat Trend

Stable

 

Star rating

**

Data as of Oct 18, 2021

Wyndham Hotels & Resorts (WH) operates 798,000 rooms across 20 brands. Its largest brands include Super 8 (representing around 30% of all hotels), Days Inn (18%) and La Quinta (10%). The U.S. represents 61% of total rooms.

Over the past several years, the company has bulked up its extended stay/lifestyle brands (2% of total properties), targeted at travellers seeking to experience the local culture of a given destination.

“Despite near-term coronavirus challenges, we expect Wyndham Hotels & Resorts to gradually expand room share in the hotel industry and sustain a brand intangible asset and switching cost advantage,” says a Morningstar equity report.

Wyndham has around 10% and 5% share of existing U.S. and global hotel rooms, respectively, with a pipeline that represents around 23% of its current unit base. As a result, the firm’s 3% room growth during the next several years will handily top the 1.8% lift projected for the U.S. hotel industry.

“With essentially all of its nearly 9,000-plus hotels managed or franchised, Wyndham has an attractive recurring-fee business model with healthy returns on invested capital, as these asset-light relationships have low fixed costs and capital requirements,” asserts Morningstar equity analyst, Dan Wasiolek, who recently upped the stock’s fair value from US$68 to US$70, incorporating second-quarter results and higher unit growth over the next 10 years. 

Marriott International Inc

 

Ticker

MAR

 

Current yield:

-

 

Forward P/E:

32.57

 

Price

US$159.10

 

Fair value:

US$130

 

Value

23% Premium

 

Moat

Narrow

 

Moat Trend

Positive

 

Star rating

**

Data as of Oct 18, 2021

A ubiquitous name in the hospitality industry, Marriott International (MAR) operates over 1.4 million rooms across 30 brands, the largest of which include Marriott, Courtyard, and Sheraton. Luxury accounts for nearly 9% of total rooms, while full service, limited service, and time-shares represent 43%, 46%, and 2%, respectively.

North America makes up 66% of total rooms. Managed, franchise, and incentive fees represent the bulk of revenue and profitability for the company.

“While COVID-19 is still materially impacting near-term travel demand in many regions of the world, we expect Marriott to expand room and revenue share in the hotel industry over the next decade, driven by a favourable next-generation traveller position supported by renovated and newer brands, as well as its industry-leading loyalty program,” says a Morningstar equity report.

With 97% of the combined rooms managed or franchised, Marriott boasts an attractive recurring-fee business model with high returns on invested capital and significant switching costs for property owners. “Managed and franchised hotels have low fixed costs and capital requirements, along with contracts lasting 20 years that have meaningful cancelation costs for owners,” says Wasiolek, who pegs the stock’s fair value at US$130.

Hilton Worldwide Holdings

 

Ticker

HLT

 

Current yield:

-

 

Forward P/E:

31.75

 

Price

US$144.08

 

Fair value:

US$105

 

Value

38% Premium

 

Moat

Narrow

 

Moat Trend

Positive

 

Star rating

**

Data as of Oct 18, 2021

Leading hospitality player, Hilton Worldwide Holdings (HLT) operates 1,019,287 rooms across 18 brands. Its largest brands include Hampton and Hilton, accounting for 28% and 21% of total rooms, respectively. Managed and franchised represent the vast majority of adjusted EBITDA, predominantly from the Americas regions.

With large scale and global presence, Hilton has cornered mid-single digit share of existing industry rooms. The company’s roughly 20% room share of the industry’s pipeline under construction would further expand its industry share.

In the U.S., the company has a low-double-digit industry room share with about 25% share of the pipeline under construction. Internationally, the operator is in the top five hotel brands, by room count.

“Hilton’s brand intangible asset is strengthening, along with improving travel demand in 2021,” says a Morningstar equity report, which projects Hilton's room share expansion to be among the industry's fastest over the next decade.

The rapid room expansion is supported by a conspiracy of factors including industry-leading pipeline, favourable next-generation traveller position supported by newer brands.

“Hilton also has a solid loyalty membership base at 112 million as of the end of 2020, which drove around 60% of total room nights during the year,” notes Wasiolek, who recently raised the stock’s fair value from US$100 to US$105, driven by higher unit growth and time value.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Hilton Metal Forging Ltd72.85 INR-4.96
Marriott International Inc Class A164.55 USD2.04Rating
Wyndham Hotels & Resorts Inc Ordinary Shares73.28 USD0.51Rating

About Author

Vikram Barhat

Vikram Barhat  A Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry, Vikram also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.

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