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The Logic of Investing in Lodging

By Brian Hill – Sep 28, 2013 at 2:39PM

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The hospitality and travel industries continue to make a solid recovery from the recession but hotel operators are still concerned about the enduring strength of consumer spending moving forward.

Things are definitely looking up for U.S. lodging chains. Revenue per available room, or RevPAR, has grown for U.S. lodging properties every year since 2009. The slow pace of hotel construction has led to tight supply for rooms and higher occupancy.

Keeping the wynd in its sails
Based on the number of properties, Wyndham Worldwide (TNL -4.59%) is the largest hotel company in the world, with 7,410 franchise hotels. The company is also a leader in the vacation rental business and in timeshare ownership marketing.

The Wyndham name brings to mind upscale properties, but the corporation has a diverse array of brands in its system, including mid-price Ramada and budget properties like Travelodge and Howard Johnson.

For the second quarter, Wyndham reported that total system revenue increased a splendid 10% from the prior year's second quarter. Each of the business segments reported healthy revenue increases. The hotel group was up 12% compared to 2012's second quarter. The vacation rentals segment reported an 8% revenue increase. And the vacation ownership segment increased 11%.

EBITDA for each segment rose as well. For the company as a whole EBITDA was up $15 million or 5.3%. The company added 240 properties to its system year over year.

Much more than a company with clever commercials
Another approach to investing in lodging is to buy online travel sites that serve hotel chains. (BKNG -2.13%), a leading provider of online travel reservations, reported second quarter results that revealed both the company's remarkable marketplace momentum and the rebound in the travel and lodging industries.

Gross travel bookings were up a striking 38% over the year-ago quarter, reaching $10.1 billion. Total revenue rose nearly 27% to $1.68 billion. Gross profit increased nearly 38% to $1.38 billion. And net income was $437.4 million, up 24% year over year.

Net income as a percentage of revenue was an astonishing 26%. This company's quarterly performance compared to the previous year was not just a one-time thing. Over the last nine quarters, year-over-year revenue growth has averaged nearly 30%, and gross profit growth 44%.

Are upscale travelers back in large numbers?
Starwood Hotels & Resorts Worldwide (NYSE: HOT) operates upscale and luxury hotels and resorts under brand names such as Westin, Sheraton, The Luxury Collection and Le Meridian. The company also markets vacation ownership interests in resorts and sells residential units in some mixed-use hotel properties. The company has 1,162 properties under its umbrella in 100 countries.

The company's overall revenue performance was not great in the second quarter; revenue was down 3.5% compared to the same quarter of 2012. The decline was primarily due to a drop in residential sales. Vacation timeshare revenue showed a strong 7.4% increase. The company brought down operating expenses by 4.7% and ended up with income from continuing operations of $138 million -- a 7% increase.

The company was pleased with the performance of its high end properties, where it has 35,000 rooms worldwide, and CEO Frits van Paasschen believes the outlook for luxury travel looks good "for some time to come."

At St.Regis/Luxury Collection properties RevPAR rose an outstanding 8.7% year over year, whereas in its more modestly priced Sheraton properties, RevPAR was up only 3.3%.

The outlook: very good
PricewaterhouseCoopers, in its "Hospitality Directions U.S." report, predicts RevPAR will be up 5.9% this year and be even better in 2014, up 6.2%. Average hotel occupancy will reach 62.9% in 2014, the study says, above the previous peak set back in 2007. Currently, the luxury segment of the market looks particularly strong as gains in household wealth have brought more leisure travelers out for upscale experiences.

What we learned
Priceline's strategy of pursuing the international markets has paid off, as gross international bookings rose 44.1% year over year, compared to 11.7% for its domestic business. International bookings were nearly 85% of total bookings in the second quarter.

With all signs pointing to continued recovery in the travel and lodging sector, Priceline should enjoy continued growth, although possibly at not as swift a pace. The company has also benefited from strategic acquisitions, and it recently welcomed the travel search engine Kayak into its group of companies.

Priceline is a technology innovator as well as a participant in the travel and lodging industries. Both factors add to its merit as an investment, and it would be my first choice. Bear in mind, though, that the stock is up more than 60% already this year, and recently crested above $1,000 per share.

Hotel chains' business models, as shown by both Wyndham and Starwood, have wisely expanded beyond the traditional hotel room night sales to include vacation rental property revenue and timeshare sales.

I applaud the way Starwood saw the slower than expected revenue and addressed it quickly by improving operating efficiency in order to maintain profitability -- indeed to exceed the profit it expected. This company should continue to benefit from the strong demand for upscale lodging. But I'm a little concerned its revenue is growing slowly given the improving market conditions.

Wyndham is so large and diversified by brand segment that it's almost like buying a hotel industry Index Fund. If the lodging industry as a whole grows as expected, Wyndham is an excellent  choice for investors. My view is that this industry is still in the early stages of its recovery, and the best is yet to come.

Brian Hill has no position in any stocks mentioned. The Motley Fool recommends The Motley Fool owns shares of Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Booking Holdings Stock Quote
Booking Holdings
$1,643.21 (-2.13%) $-35.71
Travel + Leisure Co. Stock Quote
Travel + Leisure Co.
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