Upscale hotel and resort operator Wyndham International (AMEX:WBR) is up nearly 50% since we highlighted it as a potential turnaround in 67-Cent Hotel back in November. That's great news for newcomers, but not so great for those who remember the stock's peak at almost $30 in 1997 or its 52-week low of 17 cents.

In November, we hinted at handsome returns "if the economy rebounds and the industry flourishes." Granted, that was a big if then, and it's a big if now. But it just may be coming to fruition -- and could save the company's shareholders in the process.

The industry outlook
PricewaterhouseCoopers recently forecast that demand for U.S. hotel rooms could increase 4.5% in 2004 -- after three years of contraction. "Upper-upscale luxury hotels" could see 3.9% gains in occupancy and a 1.9% jump in average room rates. "Upscale hotels" should fare even better. That rosy forecast, if it proves out, bodes well for struggling Wyndham.

Better yet, like every forecast, it could be wrong, and results could be better. Clearly, there are signs that people are traveling again. Disney (NYSE:DIS), among others, reports increased theme park admissions. The Air Transportation Association reported airline passenger traffic was up 10% in February.

What's going right
When Wyndham reported fourth-quarter results, revenue per available room (RevPAR), the industry's standard sales measure was up 0.4%. That's good, but it also stemmed from a 2.1% increase in occupancy and a 2.9% decline in the adjustable daily (room) rate. Worse, that slight increase in RevPAR did not stop the company from posting a net loss of $87.8 million (which included a $45.9 million tax-loss write-off).

The best news for Wyndham comes out of its company-owned Internet site. Every room it books online -- and for which it doesn't have to pay a third party -- nets Wyndham a $27 rate premium. That's big, and clearly there is plenty of room for growth in online bookings.

With nearly 2 million members, an innovative ByRequest loyalty program is a related plus. Members get free local and domestic long distance calls, free Internet, and a number of other services, if they book their rooms online. Starwood Hotels' (NYSE:HOT) Westin chain, by contrast, charges $16 a day for unlimited phone and Internet services.

Surprise me
Management guidance is not going to set Wyndham on fire. The company projects RevPAR increases of 3% to 4% for 2004, and a 6% gain in EBITDA (earnings before interest, taxes, depreciation, and amortization), excluding asset sales to reduce its $2.7 billion in total debt. (The latter was prudent given that $183.7 million in 2003 interest payments drove Wyndham into fallen-angel territory in the first place.) But there are reasons to believe that Wyndham may do better.

Rival Four Seasons Hotel (NYSE:FS) has already reported seeing RevPAR growth of 8% in the typically weak first quarter. Starwood is looking for RevPAR gains of 5% to 6% in 2004, while Hilton Hotels (NYSE:HLT) and Marriott International (NYSE:MAR) are each looking for 3% to 4% growth. In that context, Wyndham's RevPAR guidance looks conservative.

Moreover, in 2003, Four Seasons turned in full-year occupancy rates of 62.5% (67.6% in the U.S.). When you compare that to Wyndham's luxury resort occupancy of 43.5%, you see two things: 1) It is not just debt holding the company down, and 2) if the PricewaterhouseCoopers forecast for luxury hotel demand is correct, Wyndham has the available rooms to drive RevPAR well above guidance.

Marriott, meanwhile, posted 2003 overall occupancy rates in North America of 69%, compared to Wyndham's 66%. If Wyndham can approach Marriott's numbers system-wide, it would post materially better operating results, especially if you add in the increase in business the industry is expecting this year. Even conventions, where Fairmont Hotels Resorts (NYSE:FHR) reports bookings ahead of last year, are coming back to life.

As for securing its share of a growing pie, Wyndham has been expanding (and winning awards for) its new customer services. The company was first to offer chain-wide wired and Wi-Fi Internet access, and was the first U.S. hotel to implement wireless reservations. The company looks well positioned with features that luxury hotel customers demand.

What could go wrong
Any event that keeps consumers at home would be a major negative for all hotels. Perhaps even more so for Wyndham, given that the company's debt load is extremely high, and it needs three or four years of much-improved results to get its debt monster under control.

Moreover, while the company has offered innovations to appeal to customers, it must keep up its property maintenance. A 92-cent stock and that ton of debt will only encourage negative comments if analysts and customers perceive that properties are poorly maintained. Cutting corners is not becoming of an upscale or luxury resort.

Finally, merely hitting its RevPAR and EBITDA targets for 2004 could be bad news. The company needs to start generating free cash flow and make a serious dent in that debt to get on its feet. A mildly good 2004 simply will not serve shareholders. But again, the 2004 guidance does appear conservative, even in a highly competitive market.

The valuation case
After years of little pricing power, the hotel industry might at last enjoy a year of rising room rates and higher occupancy. Still, the happy ending for Wyndham won't likely be in 2004. The sole analyst that follows the company expects a loss of $1.62 a share and another loss in 2005 -- if the company can survive losing money at that rate.

For Wyndham, the PricewaterhouseCoopers forecast needs to materialize. That will increase room revenue well above 10% -- and make the company's EBITDA forecast appear absolutely anemic. Every dollar must be used to pay down debt, and the earlier in the year the sales are made, the faster debt can be reduced and interest payments minimized. This year will produce a net loss, but results can improve dramatically -- from debt levels to cash flows.

Most importantly, while other high-debt operators Hilton and Starwood trade at more than 1.5 times revenues, Wyndham goes for 13% of revenues. While a clear indication that Wyndham faces serious challenges, this low valuation also indicates that if the company can turn things around, especially its luxury hotels, speculators will be rewarded handsomely.

Again, that's a fairly big if. I guess that's why they're called speculations. W.D.'s angels aren't fallen for nothing.

Rather not roll the dice?
When digging up his Motley Fool Hidden Gems, Tom Gardner wants to see debt already low (or falling fast) and free cash flow rising. That helps him sleep at night and helps you avoid having to overanalyze (that is, pray for better results). Enjoy a free trial by clicking here.

Fool contributor W.D. Crotty enjoys researching speculations in his spare time, but they are a very small part of his portfolio. He owns none of the companies mentioned. The Motley Fool is investors writing for investors.