Despite concerns that lackluster economic growth, natural disasters, and terrorist attacks could hurt the hospitality industry's long-term growth, hotels should still make plenty of money over the next few years.
STR and Tourism Economics believes that revenue per available room (RevPAR) at U.S. hotels could rise 5.8% next year as occupancy rates rise 0.8%. Research firm PWC expects most European hotels to post positive RevPAR growth next year, with Dublin, Madrid, and London posting top growth rates between 4.6% and 8.8%. In China, consulting firm A.T. Kearney expects all price tiers of its hotel market to grow at compound annual growth rates of 5.8% to 6.8% between 2015 and 2022.
Those single-digit figures might not impress growth-oriented investors, but they could provide stable returns in a volatile market. Let's take a closer look at two hotel stocks that are worth watching: InterContinental Hotels Group (NYSE:IHG) and Homeinns Hotel Group (UNKNOWN:HMIN.DL).
InterContinental Hotels Group
IHG, which owns InterContinental, Holiday Inn, Crowne Plaza, and Candlewood Suites, is the largest hotel chain in the world with 726,876 rooms in more than 4,900 hotels worldwide.
Last quarter, IHG reported 4.8% annual RevPAR growth, which was higher than the 3.7% RevPAR growth its largest rival, Hilton Worldwide (NYSE:HLT), reported last quarter. IHG's RevPAR rose 4.3% in the Americas, 7.8% in Europe, 7.1% in the AMEA (Asia/Middle East/Africa) region, but slipped 0.7% in China due to severe headwinds in Hong Kong and Macau. Occupancy rates rose across the board and pricing remained solid, which helped it offset the impact of foreign exchange rates. IHG also continued selling off properties while retaining management contracts to operate the hotels. This lets IHG take profits from pricier real estate and invest the money back into its pipeline.
IHG finished the quarter with 3,135 hotels in the Americas, 544 hotels in Europe, 42 hotels in the AMEA region, and just five hotels in China. The company added 3,000 new rooms during the quarter and struck deals to add another 16,000 rooms -- including 5,000 in China. IHG notes that this addition of new hotels represents its fastest pipeline growth rate since 2008. Earlier this year, reports claimed that IHG might buy Starwood Hotels & Resorts Worldwide (NYSE:HOT) or luxury hotel chain Fairmont. But when IHG shot down those rumors in early November, its stock dipped on growth concerns. Marriott International (NASDAQ:MAR) subsequently agreed to acquire Starwood, which will help it surpass IHG as the largest hotel chain worldwide after the deal closes next year.
Despite those concerns, IHG remains a fundamentally attractive stock. It trades at 18 times earnings, which is significantly lower than Hilton's P/E of 32, Marriott's P/E of 24, and the lodging industry's average P/E of 24. IHG's forward annual dividend yield of 1.5% is comparable to Marriott's and higher than Hilton's 1.2% yield.
Homeinns Hotel Group
While IHG is a fairly low-risk way to invest in hotels worldwide, Homeinns is riskier play with more downside potential. The company is the largest budget hotel chain in China and operates economy and midrange hotels under the Home Inn, Motel 168, Yitel, and Fairyland brands. Over the past year, the stock has remained under pressure due to concerns about the Chinese stock market, weak economic growth, and lax regulations regarding U.S.-listed Chinese ADRs.
Homeinns' earnings last quarter didn't inspire much confidence. Revenue slipped 0.6% annually to $1.75 billion and missed estimates by $50 million. Non-GAAP net income dropped 8.4% annually to $32.3 million, or $4.10 per ADR share, missing estimates by $0.11. RevPAR fell 2% due to "difficult market conditions" and occupancy rates fell from 88.2% to 87.5%. Homeinns stock has stayed nearly flat since the beginning of the year, but it still isn't cheap at 35 times trailing earnings.
On the bright side, Homeinns expects its RevPAR declines to narrow in the fourth quarter. It also opened more locations (65) than it closed (28) during the quarter. Homeinns finished the quarter with 2,787 hotels and expects to finish the fiscal year with 400 new openings and 80 to 100 closures. Meanwhile, A.T. Kearney's aforementioned forecast expects budget and midrange hotels in China to experience the strongest growth throughout 2022. This means that as China's middle class overcomes current economic speed bumps and tourism rises, Homeinns' RevPAR and occupancy rates might recover.
Back in June, Homeinns received a buyout offer from a group of investors to take the company private at $32.81 per ADR share, but the deal remains unresolved. If the buyout offer falls through, the stock could tumble. But if it attracts rival bids from bigger overseas players, the stock could surge.
Do your due diligence
IHG and Homeinns are interesting companies to watch, but both stocks have underperformed the S&P 500 this year. Therefore, investors should fully understand the headwinds both companies face to decide whether or not either stock is a worthy long-term bet on the hospitality industry.