The travel industry is still in vogue. With the economy strengthening, increased spring travel has kept the hotel business bustling along. As of the end of April, the four-week average hotel occupancy rate was running above the median for 2000 to 2007.
In truth, so far this year occupancy rates are on track to make 2015 the best year ever for hotels. But there are other factors at work here.
The hotel industry is well-positioned for growth, because given the inherent limits of real estate growth, there’s only so much land left to build hotels on. Thus, as supply falls and demand continues to rise, hotels will be positioned with some impressive pricing power.
However, you do have new players like online home rental service Airbnb disrupting the hotel industry. Recall that Airbnb, based on its latest round of fundraising, is valued at close to $20 billion, which is larger than any of the three hotel stocks I cover below.
But Airbnb’s success could help fuel a consolidation movement in the hotel industry. That’s right, the major hotels could team up to fight off tech startups, leverage their networks and command even higher prices. Here are the three best hotel stocks to play the travel boom:
No. 1 Hotel Stock to Own: Starwood Hotels (NYSE: HOT)
I profiled Starwood back in February when it was spinning off its vacation business. Shares are up 10% since then, as the industry looks to be ready to start consolidating. Starwood announced last week that it’s exploring strategic alternatives, including an outright sale of the company. It has hired investment bank Lazard as an adviser, showing that they are serious about the process.
Starwood owns brands like W, St. Regis and Westin, so it’s heavily weighted to the higher end of the hotel market. Meanwhile, the lower end is where the real growth has been of late. Look for Starwood to try and link up with a hotel operator that has a strong presence in this market.
No. 2 Hotel Stock to Own: InterContinental Hotels Group (NYSE: IHG)
InterContinental Hotels Group also happens to be a prime player in the hotel industry consolidation movement. It’s headquartered in the U.K., so it’s subject to lower tax rates than U.S. companies, which could make it a prime target for a buyer.
InterContinental owns hotel brands Holiday Inn and Crowne Plaza, giving it a strong presence in the low-end hotel market. As well, its Holiday Inn Express brand is looking to increase its presence in China to leverage the growing middle class there.
It’s also interesting to income investors. InterContinental offers the highest dividend yield among major players, currently yielding 2.5%. Let’s not forget about its industry-leading double-digit returns on assets and invested capital – driven by the fact that it has 99% of its hotels franchised, limiting its need for capital expenditures.
No. 3 Hotel Stock to Own: Wyndham Worldwide (NYSE: WYN)
Wyndham makes the list given it’s a broader play on the hotel industry. It franchises over 25 brands of hotels across the upper scale all the way down to the economy scale. But it also does business in vacation rentals, running a fee-business that provides services to developers and managers of vacation rental properties. In addition, it runs its own vacation properties.
It could also be in the hunt to up its exposure to high-end properties, making it a Starwood suitor. Starwood’s franchise model (95% of properties franchised) goes hand-in-hand with Wyndham’s own strategy.
Wyndham has a strong development pipeline and is also working on increasing its presence in the online and mobile space. One interesting aspect, which should drive growth, is that it has exposure to the previously beaten up European market. Capping it off, Wyndham is the cheapest of the major players, trading at a 15.5 times forward P/E (based on next year’s earnings expectations).
Private equity is no stranger to the industry either. Note that The Blackstone Group (NYSE: BX) bought up Hilton and La Quinta a number of years ago.
In the end, the hotel industry has a number of tailwinds – including a strengthening economy and dwindling supply – but there’s also consolidation on the forefront.
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