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Hospitality Sector Sees Brighter Days Ahead


Hotel operators seem to have turned the corner.

During this recent earnings season, the hospitality sector showed signs that it may finally be coming out of its economic slump. Some analysts have recently been recommending buying airline stocks before they soar to better levels, and now the hotels are getting their fair share of praise.

(See, Which Airline Stocks Still Have Room to Fly.)

In recent days, several hospitality companies have reported slower declines in revenue and predicted improved prospects for the quarters to come. This is a good sign that consumers are opening up their wallets again as upscale hotels, which make up one-quarter of the country's hotel market, show signs of life.

"There have been high expectations for earnings in this sector and the companies have met those," says FBR Capital Markets analyst Patrick Scholes. "The forward-looking guidance was optimistic, but not overly so." Scholes notes that the upward trend for the industry really became apparent to industry insiders in December when the companies started to see higher occupancy rates.

Marriott International (MAR) was the latest of the hotel stocks to report earnings -- on Thursday it beat expectations and raised its 2010 key revenue figures. The Bethesda, MD-based hospitality company reported revenues of $3.4 billion for the quarter, beating analysts' average estimates of $3.2 billion. Meanwhile, earnings came in at $106 million, or $0.28 per share, up drastically from its loss of $10 million, or $0.03 per share in the year-prior quarter. It beat analysts' estimates of $0.25 in earnings per share. System-wide global revenue per available room (RevPAR) decreased only 12.3%, a huge improvement over the 21.4% decline the company reported in the prior quarter.

"Folks of all sorts are getting back to travel and getting back to work," said Marriott chief financial officer Carl Berquist. The company acknowledged that there's been a higher occupancy rate during the quarter, but that room rates are still weaker than they'd been during the boom period.

"Like other hotel operators that have reported, RevPAR continues to improve on a sequential basis," said Morningstar analyst Michelle Chang in a recent note to investors. "The company noted that leisure travelers are responding to marketing efforts, and business travel is showing signs of improvement."

Analysts were so encouraged by Marriott's earnings that Oppenheimer analyst David Katz upgraded the stock to "Perform" from "Underperform" and Susquehanna Financial Group analyst Robert LaFleur raised his rating to "Neutral" from "Negative."

"Fundamentals in the core hotel business are showing signs of improvement, albeit with relatively low visibility as the booking window for most operators remains short," said LaFleur. "Marriott also indicated further evidence that the international outlook is incrementally more positive than the US at present, as some regions of the world have resumed growth, such as most of Asia."

Meanwhile, Wyndham Worldwide (WYN), the world's largest hotel franchisor, reported Wednesday that it was tripling its dividend to $0.12 per share from $0.04 per share -- a yield of about 2% based on its stock price. The company, which owns Wyndham, Wingate, Ramada, Super 8, Days Inn, Knight's Inn, and Howard Johnson, reported profits of $73 million, or $0.40 per share, up from a loss of $1.4 billion, $7.63 per share, in the year-prior period. Revenues rose to $913 million from $911 million in 2008, while revenue per available room only fell 11.8% due to reduced room rates.

"We are pleased to announce a tripling of our cash dividend and our intention to resume share repurchase activity," said Wyndham chairman Stephen Holmes. "These actions reflect our confidence in the resilience of our business model, our proven ability to execute, and the sustainability of our cash flow, while maintaining investment grade credit metrics."

Starwood Hotels and Resorts Worldwide (HOT) swung to a loss of $107 million, or $0.59 per share, but still managed to raise its outlook for the year as the company continues to tout a growing period for the industry. The company now expects earnings of $0.63 per share, beating analysts' average estimates of $0.56 per share, according to Thomson Reuters. It expects RevPAR to be flat to up 5%, better than its previous guidance of flat to down 5%.

"Hotels like Marriott and Starwood continue to talk about an industry recovery," Scholes says. "It's a fragile recovery, but the recovery continues. Unless there is another financial meltdown, we can expect the hotel demand trend to continue to improve."
No positions in stocks mentioned.

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