The hospitality sector has weathered many storms over the past couple of years. In the face of relentless headwinds and headline risks -- political unrest, terrorist attacks and a fragile economic recovery -- the sector has shown tremendous resilience while contributing significantly, particularly the luxury hotels and resorts industry, to the US$2 trillion worldwide travel industry.
According to a Transparency Market Research report, the global luxury hotels market is projected to grow from US$148.6 billion in 2014 to US$195.2 billion by 2021. The ITB World Travel Trends Report 2016/17 forecasted an increase in worldwide outbound travel of between 4% and 5%, led by North America and Asia. The report attributes this growth to increased disposable income, pent-up tourism demand, simpler visa regulations and advances in technology, among other factors.
The proliferation of online booking and technological innovations in the travel and tourism industry have proved to be particularly powerful engines of growth driving the global hotel industry, which Euromonitor International projects will rack up more than US$550 billion in revenue in 2018.
The bright outlook for the industry is consistent with the performance of the Baird/STR hotel index that has jumped more than 17% for the year to date, and nearly 30% on a yearly basis, as of March 23.
The leading players in the global hospitality market are well positioned to take advantage of the industry trends and the new key market: millennial travellers. With a growing global presence, brand advantage, robust revenue generation and surging demand, these companies have a long runway of multi-year growth ahead, according to Morningstar equity research.
| Marriott International Inc. Class A | ||
| Ticker | MAR | |
| Current yield | 1.29% | |
| Forward P/E | 20.1 | |
| Price | US$93.17 | |
| Fair value | US$84 | |
| Data as of Mar. 27, 2017 | ||
A global hospitality giant, 
Marriott (MAR) operates 1.2 million rooms and owns 30 brands including Marriott and Courtyard, as well as newer lifestyle brands Autograph, Tribute and Moxy.
Last year the company acquired Starwood Hotels to become world's largest hotel chain and is on course to add another 300,000 rooms worldwide by 2019 as part of a three-year growth plan, which includes growing Starwood's presence in Europe by 2020, reports Reuters.
"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.
Marriott is an agile player in a fast-changing marketplace. The company has added new brands and renovated primary Marriott and Courtyard properties in the past few years, while enhancing technology integration and loyalty members. "These actions have led to share gains and a strong positioning with millennial travellers," says Morningstar equity analyst Dan Wasiolek, who recently raised his fair value estimate for the stock from US$80 to US$84.
Marriott has a lucrative recurring-fee business model -- 98% of its rooms are managed or franchised -- generating high return on invested capital (ROIC). Wasiolek forecasts Marriott's ROIC to average 17% over the next five years, while operating margins to expand to the high 50s in 2021 from 39% in 2016.
Over the next decade, Marriot's annual room growth is forecasted by Morningstar to average 5.1%, "supported by a favourable position with next-generation travellers, new brand growth and a strong pipeline."
| Hilton Worldwide Holdings Inc. | ||
| Ticker | HLT | |
| Current yield | 1.35% | |
| Forward P/E | 12.0 | |
| Price | US$57.85 | |
| Fair value | US$67 | |
| Data as of Mar. 27, 2017 | ||
Lodging giant Hilton (HLT) operates 760,000 rooms across 14 brands, serving the midscale to luxury segments. Hampton and Hilton are the two largest brands, each accounting for 30% of the total room count. Geographically, the Americas represents 75% of total rooms, Asia Pacific and Europe account for 10% and 12%, respectively, while Africa and the Middle East make up the rest.
Hilton's current 5% of hotel industry room share is expected to rise sharply as the company controls 22% of the rooms in the global hotel industry pipeline, says a Morningstar report. “This development growth supports our stance that Hilton is positioned to gain share over the next decade,” says Wasiolek, adding that “Hilton reported another solid year in 2016, with room growth of 6.6% and a 10% pro forma adjusted EBITDA increase.”
The company recently completed the spin-off of a large portion of its owned assets and its timeshare business. The move is expected to help streamline capital allocation. “The spin-off,” says Wasiolek, “allows for improved growth with lower capital intensity.”
In addition to being the world's fastest-growing hospitality company, Hilton has one of the largest loyalty programs in the industry. "The importance of the loyalty program is highlighted by over 56% of all room nights being booked by its [60 million] members," says Wasiolek, who puts the stock's value at US$67 and projects annual room growth of 6.1% from 2017 to 2021, and annual revenue growth of 7% over the next 10 years.
Hilton is aggressively seeking new market opportunities around the world. In 2016 alone it opened nearly one property a day (a total of 354 properties) and expanded its footprint across five new countries – The Philippines, Armenia, Montenegro, Estonia and Morocco -- a total of 104 countries and territories.
| Wynn Resorts Ltd. | ||
| Ticker | WYNN | |
| Current yield | 1.74% | |
| Forward P/E | 22.8 | |
| Price | US$114.65 | |
| Fair value | US$133 | |
| Data as of Mar. 27, 2017 | ||
Las Vegas-based Wynn Resorts (WYNN) operates luxury casinos and megaresorts including Wynn Macau and Encore (China), Wynn Las Vegas and Encore (US), and newly opened Cotai Palace (Macau). The company's upcoming property, Everett, is due to open mid-2019 in Boston.
Wynn gets 60% of its earnings before interest, taxes, depreciation and amortization (EBITDA) from Macau, where it runs one of only six gambling operations legally allowed, and 40% from Las Vegas.
"We view Wynn Resorts as a high-end iconic brand that is well positioned to participate in the attractive long-term growth opportunity of Macau, as it has expanded its room share in the region to 9% from 6% through the August 2016 opening of the Palace in the popular Cotai region," says a Morningstar equity report.
Morningstar forecasts Wynn's Macau revenue to grow by 9.6% annually during 2017 to 2026, and a more modest growth rate of 1.4% for its Las Vegas business for the same period.
The company reported fourth-quarter revenue of US$1.3 billion, up 37% from the same period a year ago, a large portion of which came from its new Macau property. Wynn is one of the biggest beneficiaries of the visitor growth in Macau, which rose by nearly 7% in December last year.
Despite the fact that the stock is nearly 30% up on a year-to-date basis, as of March 24, it's trading at "an attractive margin of safety," says Wasiolek, referring to its current price relative to his fair value estimate of US$133 per share.
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