The Best Stocks in Hotels

Photo: Kassandra Bay Resort, Flickr.

The lodging industry is expected to grow in the coming years, but not every hotel company will experience equal growth. Thus, investors should seek out the best stocks in hotels.

First, though, a little industry review. The research firm STR has recently projected continued growth for hotels in the next few years, with average daily rates rising by 5.2% to $121 by 2015's end, while revenue per available room, or RevPAR, jumps 6.6% to $79. RevPAR is expected to grow by double digits in the Denver, Phoenix, and Tampa/St. Petersburg markets. Better still, demand is expected to grow faster than supply over that period -- by 2.6% versus 1.3%. From 2013 through 2020, RevPAR is expected to grow by an annual average of about 4.9%.

One way to turbocharge hotel performance would be for occupancy rates to rise, but STR projects that the supply of "roomnights" will stay about the same to 2020. Impressively, by that time, there are expected to be about 2 billion roomnights in the supply, and average demand of about 1.3 billion, resulting in occupancy of 65%, roughly the current level.

Photo: Tony Webster, Flickr.

These projections could all turn out to be way off if there's another catastrophic event such as 9/11 or a global health crisis that derails many consumers' travel plans. They might also be affected by some other trends. Our growing income inequality, for example, can put pressure on many people's ability to spend on travel, while the growing "sharing economy," featuring companies such as Airbnb, which permit average people to offer lodging in their homes, can steal market share from big hotel chains.

Contenders
Now let's look at some of the biggest and best stocks in the hotel industry. The following table offers seven, along with some metrics for each.

Data: Morningstar.com.
*4.5-year average
**10-year average

Each of them has some aspects that would attract investors. Three that look particularly appealing to me are Starwood Hotels & Resorts Worldwide Inc., InterContinental Hotels Group, and Wyndham Worldwide Corporation.

Photo: faungg's photos, Flickr.

Starwood Hotels & Resorts Worldwide Inc.
Starwood Hotels & Resorts Worldwide sports more than 1,200 properties with more than a third of a million rooms in more than 70 countries. You might have heard of some of its brands, which include Sheraton, W, Weston, Le Meridian, Aloft, and Element. It's growing aggressively abroad, with 81% of rooms in its pipeline outside the U.S., and it's in the midst of shifting to an asset-light business model, selling off its ownership of many properties while keeping them in the Starwood family and collecting fees through franchising. It's also spinning off its time-share business as Starwood Vacation Ownership this year. There has been some speculation that Starwood might buy a smaller hotel-operator or perhaps merge with a big one -- or even get bought out itself.

Starwood isn't quite firing on all cylinders yet, which presents a buying opportunity for believers. Its last quarter featured drops in both revenue and earnings, though the decreases were less than analysts expected. In a conference call, management cited a need to reinvigorate brands such as Sheraton and to drive more top-line growth while cutting costs and becoming a leaner operation. Management is also exploring its options, including the sale of the company. It has been beefing up its dividend in recent years.

InterContinental Hotels Group
Based in the U.K., InterContinental Hotels sports brands such as InterContinental, Holiday Inn, Holiday Inn Express, Crowne Plaza, and Candlewood Suites. It franchises, leases, manages, or owns more than 4,900 hotels and 720,000 guest rooms in nearly 100 countries, with more than 1,200 hotels in its development pipeline. The company also sports the world's first and largest hotel loyalty program, with more than 80 million members worldwide.

Photo: Travel Salem, Flickr.

InterContinental's business model is already relatively asset-light, with 85% of its properties as of the end of December being franchised. In 2014, it opened 41,000 new rooms globally, while signing almost 70,000 new rooms into its pipeline, suggesting solid growth. Recovering economies in Europe should give InterContinental's substantial operations there a boost, while it aims for growth in developing economies. Its CEO Richard Solomons recently noted: "With the shift toward leisure travel, coupled with the 90 million Chinese households able to take long-haul trips by 2023, the country's growing importance in the global travel market cannot be underestimated. With 30 years of experience in China, the recent launch of our new Chinese brand, HUALUXE Hotels and Restaurants, and the rollout of our China Ready programme, IHG is well-placed to meet this growing demand."

Wyndham Worldwide Corporation
Wyndham Worldwide is a major hotelier, with more than 7,670 franchised hotels and more than 667,000 hotel rooms worldwide. Its brands include Wyndham, Ramada, Days Inn, Super 8, Howard Johnson, Travelodge, Knights Inn, Dolce, and Hawthorn Suites, among others. It's also a top dog in vacation exchanges and managed vacation rentals, serving more than 5 million families annually. Perhaps most importantly, Wyndham leads in timeshare ownership, offering its 900,000-some owners access to more than 200 vacation ownership resorts.

You may see a theme emerging here, as Wyndham Worldwide is also an asset-light business, collecting the majority of its earnings from recurring fees via hotel franchising, vacation exchange, vacation rentals, and property management. That has helped its net margins grow into the double digits over the past few years. Better still, Wyndham's dividend, which recently yielded 2%, has more than tripled in the past five years, with plenty of room for further growth.