Looking For the Best Hotel Stock
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
InterContinental Hotels Group (NYSE: IHG) is the biggest hotel company in the world in terms of rooms, with more than 4,400 hotels and 440,000 rooms in more than 100 countries. The company has a leadership position in 13 of the 20 biggest hotel markets in the world, which collectively account for 83% of the industry according to the company´s management.
InterContinental owns some of the most famous hotel brands like Holiday Inn, Holiday Inn Express, InterContinental and Crowne Plaza. Management has made a smart decision by focusing on managing and franchising its hotels, a system which provides many important advantages for the company and its shareholders:
To begin with, this business model reduces capital expenditure requirements for InterContinental, while at the same time allows for higher flexibility and speed of execution in its growth ventures. InterContinental also gets the added benefit of working with local partners who have deeper expertise regarding each particular market, and the business model provides a more resilient fee stream too. This strategy generates higher profitability ratios for InterContinental in comparison to most of its competitors.
The company is extremely well positioned to capture growth opportunities in China, which is clearly one of the most interesting countries when it comes to potential for expansion over the following years. The hotel market in China is materially underpenetrated, and there is significant room for expansion, especially in the branded mid and upscale segment.
InterContinental has been in China since 1984, and is the company with the largest number of branded hotels in the country. In terms of pipeline, the company is strongly betting on China as the growth driver for the following years. Room revenue per capita is only one fifth of US levels in China, and the branded hotel market share is 20% versus 50% in US, so the Chinese market looks like a compelling opportunity for InterContinental in the middle and long term.
When compared with competitors like Starwood (NYSE: HOT), Wyndham (NYSE: WYN), Hyatt (NYSE: H) and Marriott (NYSE: MAR), InterContinental looks like a convenient investment opportunity.
The company has the highest profitability in the group, both in terms of ROA – Return on Assets - and Operating Margins. Past performance has also been better for InterContinental, the only company in the group which has managed to increase sales over the last five years, while only Wyndham has performed better than InterContinental in terms of earnings per share during the same period.
InterContinental is the cheapest company in the table, carrying the lowest P/E ratio and the highest dividend yield in the comparison group. Considering its superior profitability and exposure to growth opportunities coming from China, this lower valuation looks like a buying opportunity in this well managed hotel company.
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