Zacks Industry Outlook Highlights: Marriott, Hilton Worldwide and Extended Stay America

Zacks Equity Research
·9-min read

For Immediate Release

Chicago, IL – November 25, 2020 – Today, Zacks Equity Research discusses the Hotels and Motels, including Marriott International, Inc. MAR, Hilton Worldwide Holdings Inc. HLT andExtended Stay America, Inc. STAY.

Industry: Hotels and Motels

Link: https://www.zacks.com/commentary/1110870/3-hotels-motels-stocks-trying-to-survive-the-industry-weakness

The Zacks Hotels and Motels industry continues to bear the brunt of dismal RevPAR and occupancy rate. Moreover, the industry participants have been witnessing a sharp increase in expenses due to the coronavirus-induced shutdowns.

However, gradual reopening of the economy has been reinstating investor confidence. Meanwhile, positive developments on the COVID-19 vaccine front have been raising hopes of recovery further. In fact, it is worth mentioning that industry players like Marriott International, Inc., Hilton Worldwide Holdings Inc. and Extended Stay America, Inc. have been gaining from reopening of the world economy.

Industry Description

The Zacks Hotels and Motels industry comprises companies that own, lease, manage, develop and franchise hotels and resorts. Some vacation ownership and exchange companies are also part of the industry.

3 Trends Shaping the Future of Hotels & Motels Industry

Dismal Demand Hurts the Industry: The coronavirus outbreak has negatively impacted travel demand globally. With meetings and conferences called off, business travelers grounded and leisure travelers forbidden to travel due to the pandemic, hotels worldwide have been witnessing booking cancellations and closures.

Most of the industry participants have also withdrawn guidance citing the virus outbreak. Per a STR report, RevPAR for 2020 is anticipated to witness a steep decline of 49.5%, while average daily rate (ADR) is expected to fall 21%. Prior to the pandemic, STR had projected flat RevPAR for 2020 — the lowest prediction since the recession of 2009.

High Costs Remains a Woe: Higher costs remain a concern for the industry participants. Given that the ongoing coronavirus pandemic continues to impact the global travel industry, hoteliers are focusing on cost saving measures to counter the crisis. Employees in the industry are facing pay cuts, layoffs, shortened working hours and furloughs. Notably, the industry participants have not only discontinued share repurchase activity but also suspended dividends in an effort to improve liquidity.

Reopening of Economy to Drive Growth: The industry has been gaining from the reopening of the economy. Per STR, occupancy for the week ended Nov 14 hit 43.2%, in sharp contrast to the industry’s historic low of 22% in mid-April. However, occupancy is still considerably below the year-ago comparable figure of 73.6%. Per STR and Tourism Economics, the industry will recapture 80% of demand by the end of 2021. However, the same will be 34.2% lower than in 2019.

Meanwhile, the increase in travel demand in China is benefiting the industry. With outbreak under sufficient control, domestic travel restrictions are being lifted, leading to an improvement in the daily number of passenger flights in China. Moreover, businesses are picking up.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Hotels and Motels industry is grouped within the broader Consumer Discretionary sector.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. The Zacks Hotels and Motels industry currently carries a Zacks Industry Rank #224, which places it in the bottom 12% of the 254 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the top 50% of the Zacks-ranked industries is the result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since Jul 31, 2020, the industry’s earnings estimates for the current year have gone down 59.2%.

Before we present a few stocks you may want to keep an eye on, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Underperforms S&P 500 & Sector

The Zacks Hotels and Motels industry has underperformed its own sector and the Zacks S&P 500 composite over the past year.

Over this period, the industry has declined 3.8% against the sector’s growth of 9.7%. Meanwhile, the Zacks S&P 500 composite has rallied 14% in the same time frame.

Hotels & Motels Industry’s Valuation

On the basis of the trailing 12-month EV/EBITDA, which is a commonly used multiple for valuing Hotels and Motels stocks, the industry is currently trading at 33.09X compared with the S&P 500’s 15.83X. It is also above the sector’s trailing 12-month EV/EBITDA ratio of 11.99X.

Over the last five years, the industry has traded as high as 33.53X and as low as 9.36X, with the median being at 15.6X.

3 Hotels & Motels Stocks Trying To Survive the Industry Woes

Marriott International:Marriott is a leading worldwide hospitality company focused on lodging management and franchising. The company is consistently trying to expand its footprint worldwide. It plans to significantly broaden its global portfolio of luxury and lifestyle brands in the days ahead. At the end of third-quarter 2020, Marriott's development pipeline had nearly 2,900 hotels, with more than 496,000 rooms.

Further, nearly 228,000 rooms were under construction. The hotel company is also trying to strengthen presence outside the United States, especially in Asia, Latin America, Middle East and Africa. Meanwhile, its European pipeline has grown consistently in the recent past and the trend is expected to continue in the days ahead.

Marriot currently carries a Zacks Rank #3 (Hold). In the past seven days, the Zacks Consensus Estimate for 2020 bottom line has moved up marginally to a loss of 22 cents from a loss of 24 cents, reflecting positive sentiments. The company’s shares have gained 24.6% over the past three months.

Hilton:Hilton is a hospitality company that owns, leases, manages, develops, and franchises hotels and resorts. In a bid to maintain its position as the fastest-growing global hospitality company, the company is continuing to drive unit growth.

During the second and third quarter of 2020, it opened 60 and 133 new hotels, respectively. As of Sep 30, 2020, Hilton's development pipeline comprised more than 2,640 hotels, with roughly 408,000 rooms across 121 countries and territories — including 33 countries and territories where it currently does not have any running hotels. With restrictions being lifted and more than 97% of its properties operating, Hilton’s business is likely to pick up on improved demand post the summer period.

The company is also likely to benefit from gradual improvement in travel demand. Increase in leisure demand in China drove occupancy rate to nearly 70% in August — the highest since December 2019. Most of the hotels worldwide are operating at breakeven levels or better. The company announced that in the United States occupancy increased 5 points month-over-month in both July and August.

Hilton currently carries a Zacks Rank #3. In the past 30 days, the Zacks Consensus Estimate for 2020 earnings has been revised upward by 52.6% to 29 cents. The company’s shares have rallied 18.8% over the past three months.

Extended Stay America:Extended Stay America is the largest integrated owner/operator of company-branded hotels in North America. In a bid to drive growth in the long run, the company is banking on numerous strategic efforts. It is refocusing on core customers in lieu of concentrating on fleeting customers.

Additionally, its initiatives toward controlling costs and decreasing capital requirement for fresh hotel builds are commendable. Under its ESA 2.0 strategy, the company aims to franchise its brands and drive growth through various expansion strategies. It also plans on enhancing digital capabilities, which would in turn bolster revenues and earnings.

Extended Stay America currently carries a Zacks Rank #3. In the past 30 days, the Zacks Consensus Estimate for 2020 earnings has been revised upward by 33.3% to 24 cents. The company’s shares have appreciated 18.2% over the past six months.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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