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LONDON -- It's time to go shopping for shares again, but where to start? There are loads of great stocks to choose from, and I've got my wallet out. So here's the question I'm asking right now. Should I buy InterContinental Hotels Group (LSE: IHG ) (NYSE: IHG ) ?
One of my broker contacts has been getting very excited about InterContinental Hotels Group. He thought it was a great way to play the U.S. recovery, claiming the current low supply of hotels gives plenty of scope for growth in total revenues per available room (RevPAR), the key measure of industry success. As the global economy recovers, the business travel market should rebound, helping to fill up those rooms. Is he right? And if so, should I buy this share?
InterContinental boasts more than 4,500 hotels in nearly 100 countries ,with a total of 672,000 rooms. Every year, 153 million people spend a night in one of its nine brands, which include Holiday Inn, Crowne Plaza, and, naturally, InterContinental. Yet the group physically owns a mere handful of those hotels, having sold the rest and signed long-term management or leasing contracts with the owners. Instead, it sells its expertise in-house management, systems, and marketing to these hotels. Its "asset light" strategy means there is a lot less capital-intensive baggage for investors to carry, and a lot more cash to count.
RevPAR for the course
Not that investors have been worrying lately. The share price is up 24% over the past three months to 18.96 pounds, helped by a reassuring Q3 2012 update, which showed strong RevPAR growth across all its key markets, and in the U.S. and China in particular. InterContinental has opened nine hotels with a total of 2,704 rooms in Greater China in Q3 alone. Group revenue rose between 1% and 3%, adjusted for currency movements, while operating profit rose 9% to $167 million. Group net debt fell to $472 million, from $644 million in 2011. The group's global diversification has been a big help, sparing it restless nights in Europe. In fact, InterContinental is one of those businesses that have benefited from the recession, as a shortage of business finance has made it tricky for smaller rivals to borrow the funds they need to compete.
One concern is an Office of Fair Trading investigation into claims that the group broke competition laws by fixing room rate discounts with two online brokers, a charge it denies. If the OFT concludes that InterContinental has breached the Competition Act, it can impose penalties of up to 10% of its turnover. Further strife in Europe, and U.S. government spending cuts, could also do some damage.
InterContinental has been a steady long-term performer, up 38% over 12 months, and 140% over five years. Earnings per share growth was a modest 3% in 2012, but is expected to rise to 14% and 11%, respectively, this year and next. I like its fat 33% operating margin, but its 2.9% yield underperforms the FTSE 100 as a whole, which offers 3.5%. The figure no investor can ignore with this stock is its price-to-earnings ratio, currently around 20 times earnings. That looks a bit pricey and leaves it vulnerable to any hiccup in China's growth trajectory. I think I'll sleep on this one.
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