The Zacks hotel and motel industry is gradually coming out of the woodwork, thanks to improving 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 sentiment, hoteliers are increasingly focusing on a number of initiatives to meet the needs of their customers 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. Industry players, namely Marriott International, Inc. MAR, Hilton Worldwide Holdings Inc. HLT and InterContinental Hotels Group PLC IHG, took advantage of the prevailing storyline.
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 the industry. Several industry participants own, develop and operate resorts. Some companies are developing lodges and villages, as well as mobile accommodation, which includes modular skid-mounted accommodation, as well as central amenities that provide long-term and temporary housing for the workforce. Some of the industry players develop, market, sell and manage vacation ownership and related products. Few hoteliers offer studios, one-bedroom suites, and accommodations for business travelers and middle-market individuals.
4 trends shaping the future of the hotel and motel industry
Occupancy still below pre-pandemic level: Although the occupancy rate is improving, it remains below the pre-pandemic level. According to STR, the occupancy rate for the week ended April 9 reached 66.4%, which contrasts sharply with the industry’s historic low of 22% in mid-April 2020. However, the occupancy rate occupancy is still below pre-pandemic levels. According to the same report, the average daily rate (ADR) and RevPAR increased by 10.6% and 5.4%, respectively, compared to 2019 for the weekly period ended April 9. The upward trend was driven by strong leisure demand in the United States. Easing of COVID-19 restrictions, increased 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.
High costs remain a misfortune: Higher costs remain a concern for industry participants. As the coronavirus pandemic continues to impact the global travel industry, hoteliers have focused on cost-cutting measures to counter the crisis. Industry employees are grappling with pay cuts, shortened working hours and furloughs. Some of the players in the sector have halted share buybacks and suspended dividends in a bid to improve liquidity.
Digitization to stimulate growth: Hotel owners continue to focus on maintaining a balance between maximizing hotel profitability and guest satisfaction. To this end, hoteliers have leveraged technologies such as mobile and online check-in and 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. This, coupled with the focus on price optimization and merchandising capabilities, should enable 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 have made every effort 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 effective levels of management, the benefits of which are expected to continue even after the pandemic subsides.
Zacks’ industry rankings point to bleak outlook
The Zacks Hotels and Motels industry is grouped within the larger sector.
The group’s Zacks Industry Rank, which is essentially the average Zacks Rank of all member stocks, indicates a bleak short-term outlook. The Zacks Hotels and Motels industry currently carries a Zacks Industry Ranking of #239, which places it in the bottom 6% of Zacks 253 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 losing confidence in the earnings growth potential of this group. Since April 30, 2021, industry earnings estimates for 2022 have declined by 3.8%.
Before we outline a few stocks you might want to keep an eye on, let’s take a look at recent stock market performance and the industry valuation picture.
Industry outperforms S&P 500
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 8.9% against a decline of 25.4% for the sector. Meanwhile, the Zacks S&P 500 composite rose 6.7%.
Year-over-year price performance
Rating of the hotel and motel industry
Based on forward 12-month EV/EBITDA, which is a multiple commonly used to value hotel and motel stocks, the sector is currently trading at 19.69X versus 16.62X of the S&P 500. It is also higher than 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.
Enterprise value/EBITDA ratio (last 5 years)
3 hotel and motel stocks to watch
Marriott: Marriott is a leading global hospitality company specializing in lodging management and franchising. The company is constantly trying to expand its presence worldwide and capitalize on the demand for hotels in international markets. Going forward, it plans to significantly expand its global portfolio of luxury and lifestyle brands. At the end of the fourth quarter of 2021, Marriott’s development pipeline totaled nearly 2,831 hotels, with approximately 485,000 rooms. Nearly 202,000 rooms were under construction. During the fourth quarter of 2021, the company added 120 new properties (20,440 rooms) to its global accommodation portfolio. In 2022, Marriott forecasts net room growth in the range of 3.5-4%.
Marriott currently carries a Zacks Rank #2 (Buy). Over the past 90 days, the Zacks consensus estimate for 2022 earnings has been revised up by 4.9%. Zacks’ consensus estimate for Marriott’s sales and earnings per share in 2022 suggests growth of 40.3% and 73%, respectively, over the prior year period. MAR shares have jumped 30.4% over the past year. You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Pricing and Consensus: TUE
Hilton: Hilton is a hospitality company that owns, leases, manages, develops and franchises hotels and resorts. In an effort to maintain its position as the world’s fastest growing hotel company, it continues to drive unit growth. In 2021, Hilton opened nearly 414 new hotels. It achieved net unit growth of 67,000 rooms, marking a 5.6% improvement over year-ago quarter levels. During the fourth quarter of 2021, Hilton opened 94 new hotels. It achieved net unit growth of almost 13,100 rooms.
Hilton currently wears a Zacks Rank #3 (Hold). Over the past seven days, the Zacks consensus estimate for 2022 earnings has been revised up by 0.5%. Zacks consensus estimate for Hilton Grand Vacations sales and earnings per share in 2022 suggests growth of 38.2% and 89.4%, respectively, over the prior year period. Shares of HLT have jumped 31.6% over the past year.
Pricing and Consensus: HLT
InterContinental Hotels: The company manages, franchises and leases hotels in the Americas, Europe, Asia, the Middle East, Africa and Greater China. The business benefited from strong leisure travel demand and improved RevPAR. Strong group bookings and international travel continue to drive business performance. InterContinental Hotels carries a Zacks Rank #3.
Zacks’ consensus estimate for IHG’s sales and earnings per share in 2022 suggests growth of 23.2% and 72.8%, respectively, over the prior year period.
Pricing and Consensus: IHG
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