Intercontinental Poised for International Growth

Investopedia Advisor submits: Intercontinental Hotel Group (IHG), the largest hotel company in the world in terms of its 3,600 rooms, is turning profits through franchisee agreements, while simultaneously expanding in the US, Asia and Latin America.

IHG hotel brands include InterContinental, Crowe Plaza, Holiday Inn, Holiday Inn Express, Staybridge Suites, Candlewood Suites and Hotel Indigo.

In 2003, Intercontinental began to change its strategy from a hotel ownership model to a hotel management and franchise development model. Intercontinental spent the majority of 2005 relinquishing hotel ownership rights mainly in the U.S. and the U.K.

The majority of the hotels that were sold remain in IHG’s system by choosing to maintain property management contracts with Intercontinental. The sale of the properties has freed up cash that Intercontinental has used to reward its investors and to increase the strength of its brand.

Branded hotel chains such as the Intercontinental Group, Marriot Hotels (MAR) and Hilton Hotels (HLT) makes up 65% of the hotel rooms in the U.S. Branded hotel proliferation in Europe, South America, the Middle East and fast-growing East Asia is only in the neighborhood of 20% to 25%.

With a growing middle class in the east and an aging U.S. population, leisure travel is expected to be on the rise over the next several years. In order to capture this growth, Intercontinental is placing multiple locations, in some cases, in countries that will ride the leisure travel wave:

• Panama. IHG is planning on building its 4th property in Panama, home of the canal that connects the Atlantic Ocean to the Pacific Ocean. Real estate mogul Donald Trump (TRMP) is also getting on board with an upcoming project of his own in Panama. The IHG property will be a hotel and a learning facility that will allow students to learn the management trade of the hospitality industry.
• China. IHG completed 4 hotels in China between June and July this year bringing its total footprint on the mainland to 57 hotels. With a stated goal of 125 hotels by 2008, and China having both the 2008 Olympics and the 2010 World's Fair on the way, the coming years will surely push occupancy rates to capacity.

IHG is scheduled to release earnings today for the first half of 2006. Revenue numbers are expected to be lower due to the sell-off of properties to compete with Marriott, who has also adopted a similar franchisee and management profit model. First half revenues in 2005 for Continental were $1.3 billion, with expected first half revenues for 2006 coming in slightly above $900 million. IHG’s PE is 12.28, while the hotel industry's average PE is 25.

With a stock price in the $17 trading range, IHG is worth a look, especially if investors push the stock downward on lower earnings without recognition of the company’s future value.

IHG 1-year chart:

By Gregory Davis, Contributor - Investopedia Advisor

At the time of release Gregory Davis did not own any shares in any of the companies mentioned in this article.