Buy Starwood Hotels on Strong Bookings and Upgrade
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It seems like it has been some time since hotel stocks were anything to get excited about. High unemployment led individuals to take fewer vacations, and the meltdown of the global economy meant that business travelers were finding alternatives. Additionally, as technology continues to improve, business travel is down independent of economic conditions. Despite these factors, evidence shows that bookings have been strong – stocks in the sector have performed well, with a few hitting new highs. Against this backdrop, an attractive valuation and a recent upgrade, shares of Starwood Hotels and Resorts Worldwide (NYSE: HOT) look attractive at current levels.
Hotel shares in general performed well last week after certain analysts reiterated positive opinions of the sector. After a lull in July numbers, bookings have been strong and are projected to continue to grow through the end of the year. Furthermore, corporate activity by two of the largest hotel operators can be seen as a positive for the industry on a forward-looking basis. Marriott International (NYSE: MAR) has announced its intention to invest $2 billion to open new locations over the new three years. Intercontinental Hotels Group (NYSE: IHG) announced its plans to return up to $1 billion to shareholders, calling the move “a reward for an increase in profits.” Overall, the industry has shown various signs of strength that are gaining the attention of investors.
Last Friday, Argus upgraded Starwood Hotel to a buy from a hold recommendation based on various factors. When combined with the general strength in the industry, the stock should have upside beyond its 52-week high of $60.81. While investors have worried that weak economic conditions in both Europe and Asia would have a negative drag effect on these stocks, the numbers have been strong. The consensus rating on the stock is a buy with a neutral bias, but the company appears to be gaining broad based support.
Relative to other large hotel operators, Starwood is very aggressively priced at current levels. The stock carries a trailing P/E of 19.7 relative to a multiple of 65.1 for Marriott and 56.7 for Hyatt Hotels (NYSE: H); only Intercontinental is more attractive with a P/E of 13.3. Starwood had year-over-year quarterly earnings growth of 14% relative to 8% for Hyatt, 3% for Intercontinental and a contraction of 29% for Marriott. This sector tends to be a bit of a balancing act between value and growth on different terms than in other industries. While investors like to see a solid combination in any company, when a hotel chain is expanding, it tends to have a carry-over effect – the newest hotels, outside of the historic few, get the most business. Not only does growth represent health today, it tends to carry the positive message for a longer duration.
The bearish case for hotels centers around intensifying weakness in the economy. If the various measures being attempted are unsuccessful, the economy could easily contract. This is to say that we are nowhere near a full economic recovery as of yet. This tends to be an easy area for individual and business consumers to cut, so general fiscal health should be monitored.
Overall, a reasonable allocation to the sector looks wise at this time. Amongst many strong options, Starwood looks to be the best choice. Its combination of solid numbers and a recent catalyst should provide investors with solid upside.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.