3 hotel and motel stocks to buy in a thriving industry – August 23, 2022

The Zacks hotel and motel industry is gradually coming out of the woodwork, thanks to growing demand. Although the occupancy rate is improving, it remains below the pre-pandemic level. However, people are feeling more optimistic and confident about the prospect of traveling again. To capitalize on this bullish sentiment, hoteliers are increasingly focusing on a number of initiatives to meet the needs of their guests when they return to hotels. The industry has shown resilience through cost reduction initiatives and digital improvements. Hotel owners continue to focus on maintaining a balance between maximizing hotel profitability and guest satisfaction. The industry benefits from an increase in ADR and RevPAR. Industry players, namely Marriott International, Inc. (TUE free report), Hyatt Hotels Corporation (H free report) and Marriott Vacations Worldwide Corporation (VCA Free Report), have taken advantage of the prevailing scenario so far.

Description of the industry

The Zacks Hotels and Motels segment includes companies that own, lease, manage, develop and franchise hotels. Some vacation ownership and exchange companies are also part of this industry. Several industry participants own, develop and operate resorts. Some companies are developing lodges, villages, and mobile accommodations, which include modular skid-mounted accommodations and central amenities that provide long-term and temporary housing for the workforce. Some industry players develop, market, sell and manage vacation ownership and related products. A few hoteliers offer studios, one-bedroom suites, and accommodations for mid-sized business and personal travelers.

4 trends shaping the future of the hotel and motel industry

Strong RevPAR and ADR that drive growth: Although the occupancy rate is improving, it is below the pre-pandemic level. The industry benefits from robust ADR and RevPAR. Per STR, occupancy for the month ended July was 69.6%, down 5.4% from the July 2019 level. However, ADR and RevPAR increased by 17.5% and 11.2% to reach $159.08 and $110.73 respectively. The uptrend was driven by strong US leisure demand. Easing of COVID-19 restrictions, higher vaccination rates and improved business activity contributed to the rise. Hotel demand in 2022 is expected to be driven by leisure travelers from Europe and Asia-Pacific.

Digitization to foster growth: Hotel owners continue to focus on maintaining a balance between maximizing hotel profitability and improving guest satisfaction. To this end, hoteliers have leveraged technologies such as mobile and web check-in as well as mobile key. Hoteliers have also increased the use of these digital tools to bolster infrastructure, grow online package sales, enable self-service bookings, deliver real-time offers, and improve the overall guest experience. That aside, the focus on price optimization and merchandising capabilities will likely allow hoteliers to capture additional market share.

Initiatives to attract customers: First, hoteliers engage in comprehensive cleaning, disinfection and infectious disease prevention processes. To this end, they have appointed a trained Hygiene and Wellness Officer responsible for a clean and safe environment for staff and guests. Second, companies are making concerted efforts to improve the contactless experience and take advantage of technologies, such as mobile and web check-in and mobile key. Industry players have resorted to streamlining operations with efficient levels of management, the benefits of which are expected to continue even after the pandemic is over.

High costs remain a misfortune: High costs remain a concern for industry players. As the coronavirus pandemic continues to impact the global travel industry, hoteliers are constantly focusing on cost-cutting measures to counter the crisis. Some of the players in the sector have halted share buybacks and suspended dividends in a bid to improve liquidity.

Zacks’ Industry Rankings Indicate Bright Prospects

The Zacks Hotels and Motels industry is grouped within the larger sector.

The group’s Zacks Industry Rank, essentially the average Zacks Rank of all member stocks, indicates a sunny near-term outlook. The Zacks Hotels and Motels industry currently holds a Zacks Industry Ranking of #44, which places it in the top 17% of Zacks 252 industries. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the top 50% of industries ranked by Zacks is the result of a positive earnings outlook for the constituent companies overall. Looking at revisions to aggregate earnings estimates, it appears analysts are gradually gaining confidence in the earnings growth potential of this group. Since March 31, 2022, industry earnings estimates for 2022 have increased by 16.3%.

Before we outline a few stocks you might want to watch, let’s take a look at recent industry stock performance and the valuation chart.

Industry outperforms S&P 500 and sector

The Zacks Hotels & Motels sector has outperformed both the Zacks S&P 500 composite and its own sector over the past year.

During this period, the industry gained 3.1% against a 35.1% decline in the sector and a 6.9% drop in the Zacks S&P 500 composite.

Rating of the hotel and motel industry

Based on forward 12-month EV/EBITDA, a multiple commonly used to value hotel and motel stocks, the sector is currently trading at 19.69X versus the S&P 500’s 20.08X. Meanwhile, it is also above the industry’s 12-month EV/EBITDA ratio of 12.94X.

Over the past five years the industry has traded as low as 23.74X and as low as 9.77X with the median at 13.68X as seen in the chart below.

3 hotel and motel stocks to watch

Marriott: Marriott is a leading global hospitality company specializing in lodging management and franchising. MAR is constantly trying to expand its presence worldwide and capitalize on the demand for hotels in international markets. Going forward, MAR plans to significantly expand its global portfolio of luxury and lifestyle brands. At the end of the second quarter of 2022, its development pipeline totaled nearly 2,942 hotels, for approximately 495,000 rooms. Nearly 203,300 rooms were under construction. During the quarter, MAR added 97 properties (16,917 rooms) to its global accommodation portfolio. In 2022, it forecasts net room growth of around 3 to 3.5%.

Marriott currently carries a Zacks Rank #2 (Buy). Over the past 60 days, the Zacks consensus estimate for 2022 earnings has been revised up by 6.8%. Zacks’ consensus estimate for MAR’s sales and earnings per share in 2022 suggests growth of 46.1% and 101.3%, respectively, over the corresponding period of the prior year. The stock is up 15.4% over the past year. You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Pricing and Consensus: TUE

Hotel : H benefited from strong demand for leisure passengers, an easing of travel restrictions and an increase in airline capacity. Additionally, the focus on hotel openings and acquisition initiatives bodes well. Hyatt is constantly trying to expand its presence around the world and has expansion plans in the Asia-Pacific region, Europe, Africa, the Middle East and Latin America.

Hyatt currently carries a Zacks rating of 2. Over the past seven days, the Zacks consensus estimate for 2022 revenue has been revised up 50%. Zacks’ consensus estimate for H’s sales and earnings per share in 2022 suggests growth of 89.1% and 110.9%, respectively, over the prior year comparable period figures. The stock is up 20.5% over the past year.

Price and Consensus: H

Marriott Vacations Worldwide: VAC has seen improved occupancy rates, underscoring people’s willingness to go on vacation. During the second quarter of 2022, Marriott Vacations reported strong occupancy rates for its Aqua-Aston business. VAC saw year-over-year growth in occupancy and RevPAR.

Marriott Vacations currently sports a No. 1 Zacks rank. Over the past seven days, Zacks’ consensus estimate for 2022 earnings has been revised up 1.1%. Zacks consensus estimate for ACC’s 2022 sales and earnings per share suggest growth of 19.7% and 131.4%, respectively, over the actual figures for the corresponding period of the previous year . The stock is down 5.1% over the past year.

Pricing and Consensus: VAC