This Travel Industry Is Hot

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With the rebounding economy, the hotel industry is heating up and it appears that Starwood Hotels (NYSE: HOT) is the hottest. Starwood is a leading hotel and leisure company, with brands that include St. Regis, Westin, Sheraton, Four Points and Element -- having over 1,000 hotels in 100 countries.  

S&P noted that hotel room pricing was up 4.2% and occupancy was up 2.5%. Meanwhile, revenue per available room for same-store hotels was up 5% in 2012, with estimates for another mid- to high-single digit rate increase in 2013. 

Starwood is positioned nicely in international markets. Its earnings breakdown is weighted toward the America's (45% of earnings), with Europe and the Middle East accounting for 15%, and Asia nearly 20%. The 55% of earnings generated from outside of the U.S. is well above any major peer. What's more is that Starwood hopes to boost its total number of hotels in China from 109 at the end of 2012 to 130 by 2013 end. 

One of the key initiatives for Starwood is the transformation into more of a fee-based hotel operator. The fee-based business is more capital efficient than owning hotels, where the owner provides the capital to build the property and Starwood earns a fee for managing/franchising the hotel. Starwood hopes to generate some 80% of profits via franchise fees by 2016. 

Starwood is also on a mission to downsize its underperforming properties. In the four years up to 2012, Starwood brought in $1 billion in sales, and it plans to generate another $3 billion by 2016. 

Enjoying your stay elsewhere?

Although Starwood should see positive performance thanks to a rebounding economy, there might be other top hotel picks worth putting in your portfolio. 

Marriott (NYSE: MAR) is another major lodging company with more than 3,700 properties in 73 countries and territories. Its brands include Marriott, The Ritz-Carlton, Renaissance, Courtyard, Fairfield Inn and Residence Inn.

The one headwind for Marriott is that its has more exposure to North America versus some of the other major hoteliers. But the company hopes to change this. Marriott's largest market outside of North America is China, where it plans to double the number of properties by 2015 and have hotels in fifty Chinese cities by 2016. Other international expansion plans include doubling its properties in Europe by 2015, and doubling its properties in Latin America by 2017. 

Back in 2010, Marriott inked a deal with Spanish hotel group AC Hotels to manage and franchise a new lodging brand across Europe and Latin America. What's more is that the brand belongs to the upper-moderate tier, (which should be pushed higher with a rebounding economy), and just earlier this year the company announced plans to launch the European brand in the Americas.

The other key differentiator for Marriott is that it owns only a few of its lodging properties. Rather, Marriott generates fees from lodging property owners by manning their properties and allowing the properties to operate under the Marriott brand.

Take a vacation

The other major hotel option is Wyndham (NYSE: WYN), which operates the Wyndham Hotels, Ramada, Days Inn and Super 8 brands. The hotel company posted quarterly EPS of $0.71, versus $0.60, on the back of 20% year over year increase in lodging revenues. Meanwhile, domestic revenue per average room was up 6%, while the international segment was flat. 

Wyndham has a dominant position in the vacation rental business -- with more than 100,000 properties in its vacation rental portfolio. In 2012, the hotel operator acquired two beach resorts, one in the U.S. and one in the U.K. Wyndham also snatched up the Smoky Mountain Property Management business in 2012. 

Wyndham gets a large portion of revenue from its vacation ownership or timeshare business, which has solid long-term potential. Wyndham Vacation Ownership is the largest vacation ownership business, with respect to the number of resorts and sales. The timeshare and vacation business offers one of the best yields per unit in the industry. 

Hedgie trade

Going into 2nd quarter, Starwood had interest from hedge funds, with 38 funds long the stock -- a 12% increase from the previous quarter. This includes the hedge fund with the highest position, billionaire Steve Cohen's SAC Capital, with a $117 million position. Wyndham had 33 hedge funds long the stock; meanwhile, Marriott had only 22 hedge funds long the stock.

Bottom line

Starwood trades just below Marriott and Wyndham at at only 19 times earnings, and Starwood is seeing the biggest rebound in its free cash flow generation over the past few years.

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As a result, I like Starwood the best, given its valuation and international growth prospects. However, with Marriott's big plans for international expansion and Wyndham's stronghold in the vacation market, the two could be worthwhile investments to check out. 

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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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