Increasing household wealth, an aspirational middle class, a growing global traveller pool and global economic recovery are driving the US$1.6 trillion worldwide travel industry like never before. One sector that directly benefits from these trends is hospitality, or more specifically, the hotel industry.
According to a Transparency Market Research report, the global hotel market is projected to grow at a steady 4% rate annually, rising from US$534 billion in value in 2014 to US$702 billion by 2021. This year alone, the sector is forecasted by a Deloitte report to sustain 5% to 6% growth, clocking a record-breaking US$170 billion in bookings.
Recently, though, uncertainty around U.S. President Donald Trump's controversial immigration and trade policies, a turbulent geopolitical environment and data security issues have taken their toll on industries across sectors, including hospitality. The resultant overhang on the hotel industry is amply evident in the Dow Jones U.S. Hotels Index, which fell from a high of 2,200 points in late January to around 1,950, at the end of June -- an 11% drop. For the same period, the Baird/STR hotel index has plummeted 13% off its January peak, compared to 2.6% gains for the S&P 500 index.
However, this short-term weakness notwithstanding, the industry fundamentals remain attractive. Leading hotels are benefiting from growth in demand and uptick in both occupancy and average daily rate. With modern designs, digital integration, creative food and beverage menus, lifestyle offerings and expansion to faster-growing emerging markets, the dominant players are well positioned to attract both business travellers and vacationers, and to fend off disruptive threats such as private accommodation rentals.
| Marriott International Inc. Class A | ||
| Ticker: | MAR | |
| Current yield: | 1.07% | |
| Forward P/E: | 24.0 | |
| Price: | US$130.51 | |
| Fair value: | US$120 | |
| Value: | 8.8% premium | |
| Data as of July 16, 2018 | ||
A global hospitality giant, 
Marriott (MAR) operates 1.27 million rooms across 30 brands including leading names such as Marriott, Courtyard and Sheraton. The company's newer lifestyle brands include Autograph, Tribute and Moxy. North America comprises 70% of total rooms, with Asia-Pacific around mid-teens.
"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 report.
The company became the world's largest chain of hotels after acquiring Starwood Hotels in 2016 for US$13 billion. "We see the acquisition of Starwood as strengthening Marriott's brand advantage, as Starwood's global luxury portfolio complements Marriott's dominant upper-scale position in North America," says the report.
Marriott has maintained its dominance by keeping pace with newer trends, adding new brands, renovating core properties and improving its technology integration. "These actions have led to share gains and a strong positioning with millennial travellers," says Morningstar equity analyst Dan Wasiolek, who recently upped the stock's fair value from US$115 to US$120.
With 96% of its rooms managed or franchised, Marriott has an attractive recurring-fee business model that generates high return on invested capital (ROIC). Wasiolek projects that over the next five years, "the firm will have healthy adjusted ROICs (26%), expanding margins (growing from 10.3% to 13%), and accelerating room growth (5% annually)."
Marriott revenue is forecasted by Morningstar to grow at a 7% annual clip through 2027, bolstered by increasing demand in emerging markets that are experiencing more middle-income class growth.
| Hilton Worldwide Holdings Inc. | ||
| Ticker: | HLT | |
| Current yield: | 0.74% | |
| Forward P/E: | 30.1 | |
| Price: | US$80.51 | |
| Fair value: | US$80 | |
| Value: | 0.6% premium | |
| Data as of July 16, 2018 | ||
Hilton (HLT) operates 863,000 rooms globally across 14 brands that range from the midscale to luxury segments. The two largest brands, Hampton and Hilton, each comprise 30% of total room count. In a geographically diversified presence, the Americas constitute 70% of total EBITDA, while Asia-Pacific (10%), Europe (15%) and Africa and Middle East (5%) make up the rest.
Boosted by its industry-leading pipeline, newer brands and an enviable loyalty program, Hilton's room share is expected to grow the fastest in the industry 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 report.
Its U.S. share of existing rooms is low-double-digits, with a pipeline share of rooms under construction at roughly 25%.
Managed and franchised represent 90% of adjusted EBITDA, after the spin-offs of its timeshare business and the bulk of owned assets last year. "These asset-light rooms not only offer high returns on invested capital, but also contract lengths of 20 years that are costly to terminate," says Wasiolek, whose estimate of the stock's fair value of US$80 is currently very close to its market price.
Hilton is aggressively expanding its presence in Asia, where it opened 40 new hotels in 2017. The region now has 220 Hilton properties in operation with another 415 in the pipeline.
With 74 million members, Hilton also has one of the larger loyalty programs. Members accounted for 59% of all rooms booked in the first quarter of 2018, says Wasiolek, who forecasts annual room growth of 5.4% and annual revenue growth of 6.9% over the next five years.
| InterContinental Hotels Group PLC ADR | ||
| Ticker: | IHG | |
| Current yield: | 1.58% | |
| Forward P/E: | 22.7 | |
| Price: | US$64.91 | |
| Fair value: | US$57 | |
| Value: | 13.9% premium | |
| Data as of July 16, 2018 | ||
InterContinental Hotels Group (IHG) owns 12 brands, including ubiquitous names such as Holiday Inn and Holiday Inn Express. The chain's newer lifestyle brands include Hotel Indigo, Even and Hualuxe. Managed and franchised represent 99.5% of the 800,000 rooms it operates in the Americas (61% of total rooms), greater China (13%), as well as in Europe, the Middle East and Africa.
The company opened 48,000 rooms in 2017 and now has a 5% global share of existing industry rooms, which is poised to grow further. "We expect InterContinental Hotels Group to expand room share in the hotel industry in the next decade, driven by a favourable next-generation traveller position supported by renovated and newer brands," says a Morningstar report.
InterContinental also has one of the strongest online presences, and with 100 million members its loyalty program ranks among the highest in the hotel industry, which attracts third-party owners and boosts the brand.
The company currently has a mid-single-digit percentage share of global hotel rooms and mid-teens share of all industry pipeline rooms. Morningstar projects its room growth to average near mid-single-digit rates over the next decade.
The hospitality behemoth is positioned for a 7.3% annual revenue growth for the next 10 years, led by high-single-digit unit growth in China, a market poised for 6.3% projected growth in revenue per available room -- faster than anywhere else. "The region is currently 13% of rooms for the company but is set to grow, as 30% of the pipeline is in China," forecasts Wasiolek, who estimates the stock is overvalued at its current price relative to its US$57 fair value.
| Wyndham Hotels & Resorts Inc. | ||
| Ticker: | WH | |
| Current yield: | - | |
| Forward P/E: | - | |
| Price: | US$58.75 | |
| Fair value: | US$75 | |
| Value: | 21.7% discount | |
| Data as of July 16, 2018 | ||
Wyndham Hotels & Resorts (WH) operates 810,000 rooms across 21 brands, including popular names such as Super 8, Ramada and Days Inn. The company's brand portfolio ranges from the economy (around 70% of total rooms), to midscale (20%) and lifestyle (4%) segments. The United States represents roughly 65% of total rooms.
All but two of its 8,422 properties are managed or franchised, which helps Wyndham generate recurring fees and healthy returns on invested capital.
"Wyndham has 10% and 5% share of existing U.S. and global hotel rooms, respectively, with a pipeline that represents around 20% of its current unit base," says a Morningstar report. "As a result, we see room growth averaging around 3% over the next decade, above the 2% long-term U.S. supply growth average."
Wyndham's brand is supported by high customer satisfaction ratings, measured by J.D. Power, which awarded the company four of the top five brand rankings in both the economy and midscale segments.
The lodging giant also has one of the strongest loyalty programs with 70 million members, making it the fourth-largest in the industry. Loyalty guests can use and accumulate points across all its properties and, therefore, tend to "stay at Wyndham twice as much and spend nearly 100% more than non-members," says Wasiolek, who pegs the stock's fair value at US$75, implying a 2018 EBITDA of 13.3 times
The recent acquisition of La Quinta brought an additional 13 million loyalty members, 87,500 rooms and a pipeline of 23,700 units, boosting Wyndham's competitiveness and long-term growth, says Wasiolek, who projects annual revenue growth of 10.8% for the next 10 years.
