Hotel Stocks Due for Correction

By: Sean P. Smith

Shares of Marriott (MAR) have rallied approximately 85% from the lows reached in early March. Shares of Starwood (HOT) have climbed even higher, rallying roughly 150% since early March. Shares of other companies in the industry, including Intercontinental Hotels Group (IHG) and Wyndham Worldwide (WYN), have made similar moves. Given the current state of industry fundamentals, and our expectation that operating metrics will continue to deteriorate, we consider the magnitude of these moves to be excessive.

Revenue per available room, or RevPAR, is a key operating metric in the lodging industry. This metric is derived by multiplying the occupancy percentage of a hotel over a given period by the average daily room rate, or ADR, over that same period. Changes in either occupancy or ADR will impact RevPAR, but with different implications for bottom-line profitability.

The charts below present the weekly year-over-year changes in RevPAR, occupancy and ADR.

[click to enlarge charts]



Weekly RevPAR declines have remained fairly steady, with declines averaging roughly 19% to 20% year-over-year. We expect these declines to moderate as the year progresses, based on the fact that the market began to deteriorate in late 2008, thus creating easier comparisons.



Occupancy declines have moderated somewhat, with year-over-year declines averaging from 13% to 11%. This moderation is due in part towards easier comparisons versus the prior-year periods.



More than offsetting the occupancy moderation, however, have been accelerating declines in average room rates, as seen above. The trend towards lower room rates is troubling, in our opinion, as we expect that is will increase both the severity and length of this downturn.

Changes in ADR have a greater impact on the bottom line than do changes in occupancy, due variable expenses tied to occupancy.

More importantly, however, is the fact that once hotel owners and operators cut ADR, it can be difficult to return those room rates to their pre-cut levels without generating significant resistance from customers. This can keep room rates depressed for a longer period of time, prolonging the downturn.

As an example, after hotel companies cut room rates in the wake of 9/11, it took more than five years in many markets for the properties to return ADR to its pre-9/11 levels.

We do not believe that the current share prices of hotel companies accurately reflect the risk that the current downturn may be prolonged by these rate cuts. As such, we reiterate our Sell rating on shares of Marriott and Starwood, and maintain our negative outlook on the industry.

Comments

[apppro:]

I continue to find it totally deplorable that all these (you) pundits keep saying we need a correction from a level WE SHOULD NEVER HAVE BEEN AT IN THE 1ST PLACE!

Stocks due for a correction? What a joke these kind of comments truly are. They're due for a correction ONLY for the shorties' prayers and dreams that kept trying to bring our economy down thru 'The Shorting of America".

lol

May 31 09:18 AM

[ECONOMICS 101:]

Jim Mancinelli says thank you for the information.

I also had no idea the sector had such a gain since March.

Go economy go!!!

Let's get out and fill those rooms and drive the economy people!!.

By Johnathan Vrozos
johnathanvrozos.com
johnathanvrozos.ca

Jun 01 08:10 AM

[Tony L:]

Starwood has a long history of providing conservative guidance tp analysts and handily beat earnings estimates each and every quarter. However, the outlook the next two years is so bad that even when they beat estimates they are still on track for about 1/3 the earnings they had in 2006-2008.

If they miss the estimates by even a narrow margin this quarter look out below.

Jun 01 12:44 PM