Four hotel stocks buoyed by a recovering hospitality market

Investors looking for a lodging market play may want to follow these stocks. Although trading close to or slightly under their fair value at present, a meaningful pullback could create an attractive entry point in the future.

Marriott, the world’s biggest hotel company, operates about 1.3 million guest rooms globally across 30 brands including Marriott, Courtyard and Sheraton as well as newer lifestyle brands Autograph, Tribute and Moxy. North America makes up 67% of total rooms.

Marriott’s strong competitive position is reflected in its 16% share of North American rooms. It also enjoys a dominant position in Asia-Pacific with 6% of all existing rooms (above the 5% share held by Hilton).

“We expect Marriott to expand room and revenue share in the hotel industry over the next decade, driven by a favourable next-generation traveller position supported by renovated and newer brands, as well as its industry-leading loyalty program,” says a Morningstar equity report.

Marriott’s net unit has been growing at 5.5% over the past three years, well above the 2% U.S. industry average. “Marriott is well-positioned to expand its room share further and achieve its target for 230,000 to 255,000 net room adds over the next three years, implying 5.8% annual growth,” says Morningstar equity analyst Dan Wasiolek, who pegs the stock’s fair value at US$127.

Wyndham Hotels & Resorts (WH) operates 812,000 rooms across 20 brands in the economy and midscale segments. The company’s leading brands include Super 8 (representing around 22% of all rooms), Days Inn (17%) and Ramada (14%). The U.S. represents 62% of total properties.

Wyndham has been making a push into extended stay/lifestyle segment favoured by travellers seeking cultural experience. The company acquired La Quinta last year with a view to court families and budget-minded travellers with an additional 90,000 no-frills rooms.

The operator is expected to continue to gradually expand room share in the hotel industry and boost its competitive advantage. “This view is supported by the company’s roughly 40% share of all U.S. economy and midscale branded hotels,” says a Morningstar equity report, noting that the company also has the industry’s fourth-largest loyalty program (around 75 million members), which encourages third-party hotel owners to join the platform.

With a pipeline that represents around 22% of its current unit base, Wyndham’s room growth is expected to averaging just over 3% over the next decade, says Wasiolek. Given that nearly all of its 9,000-plus hotels are managed or franchised, he says that “Wyndham has an attractive recurring-fee business model with healthy returns on invested capital,” and recently raised the stock’s fair value from US$72 to US$74.

A ubiquitous name in the hospitality industry, Hilton Worldwide Holdings (HLT) operates 923,000 rooms across 15 brands catering to the midscale through luxury segments. Hampton and Hilton are the two largest brands, collectively accounting for more than 50% of room count.

Hilton’s industry-leading pipeline, its appeal among younger travellers, and its highly rated loyalty program conspire to drive room share expansion, expected to be among the industry’s fastest over the next decade. “The company currently has mid-single-digit share of global hotel rooms with around 20% share of all industry pipeline rooms under construction,” says a Morningstar equity report.

In addition to brand equity, Hilton enjoys switching cost barriers through its “asset-light rooms [that] not only offer high returns on invested capital, but also contract lengths of 20 years that are costly to terminate,” says Wasiolek, who recently upped the stock’s fair value from US$84 to US$90, prompted by higher net room growth.

Hyatt (H) operates 852 owned (8% of total rooms) and managed and franchise (92%) properties across 16 upscale luxury brands. Americas account for 68% of total rooms, Asia-Pacific another 19%, while the rest are spread across of world.

Hyatt is projected to expand its global room and revenue share over the next decade, driven by favourable demographics. “We see the company’s room growth averaging in the mid-single digits over the next decade,” says a Morningstar equity report, pointing out that “Hyatt's pipeline of 91,000 rooms is an industry-leading 43% of its existing room base, and the company’s 7.3% net unit growth in the [most recent] quarter was the sixth straight quarter above 7%.”

Since 2006, Hyatt has grown from five to 16 brands. Its new hotel brands target a younger cohort of travellers thereby strengthening the company’s brand. “Hyatt’s growing brand advantage is witnessed by its managed and franchised unit growth that has averaged more than 11% annually the past five years,” far surpassing U.S. supply growth of 2%, says Wasiolek. A 40% jump in loyalty member signings, strong pipeline growth (25%), and net organic unit growth (7%) prompted him to revise the stock’s fair value from US$76 to US$78.