Everything hotel-related was hopping last week, with a number of hotel stocks shooting higher after earnings. Investor excitement was also boosted by Expedia’s (NASDAQ: EXPE) acquisition of Orbitz Worldwide (NYSE: OWW) for $1.3 billion.
The key hotels releasing earnings were Wyndham Worldwide (NYSE: WYN) and Starwood Hotels & Resorts (NYSE: HOT). Their earnings were solid, helping boost the stock prices of many industry giants.
This includes the likes of Hilton (NYSE: HLT), Marriott International (NYSE: MAR), Wyndham and Hyatt Hotels (NYSE: H), most of which are up 5% or more over the last week alone.
But, in reality, the entire travel industry is looking up.
For the first week of February, U.S. hotel occupancy climbed 1.9% year-over-year to 57.5%. Revenue per available room rose 5.5% to $65.32, and even the average daily rate was up 3.5% at $113.55.
So hotels are seeing improved efficiency thanks to growing demand, and they have also been able to up their prices, which means that the industry is seeing growth in occupancy and pricing — a double whammy.
The really great news is, with the current pace of hotel occupancy so far this year, we’re on pace to have the best year ever for hotels — surpassing the year 2000.
With all that, what are the best ways to play this market?
Travel Boom Play No 1: Starwood Hotels (NYSE: HOT)
Despite the recent run-up of the major hoteliers, one of the laggards has been Starwood. While all the major players are moving higher, I think the misunderstood business model of Starwood means that investors are shunning the stock.
Starwood is not just a hotel operator, but it also has vacation properties, like timeshares. However, the good news surrounding the stock is that it recently announced plans to spin off its vacation business this year.
Recall that Marriott International (NASDAQ: MAR) spun off its vacation business back in 2011. Both stocks, Marriott International and Marriott Vacations (NYSE: VAC), have crushed the return of the S&P 500 since then. The spinoff will allow Starwood to focus on the hotels business.
So while Starwood has been underperforming most of its peers over the last year it still has one of the highest operating margins and returns on invested capital in the business. Its dividend yield of 1.8% is also industry tops.
Travel Boom Play No 2: Expedia (NASDAQ: EXPE)
Then there’s the travel booking industry. The robust hotel industry is good news for travel booking sites as well.
Despite the strong performance of late, Expedia could still have more upside. The news that Expedia is buying Orbitz comes just a few weeks after its purchase of Travelocity.
This type of industry consolidation is a positive for Expedia, where less competition means more pricing power. The acquisitions also means cost savings for Expedia. The Orbitz deal is expected to lead to $75 million in cost savings a year for Expedia.
Expedia is up 16% for the last year and now trading at a price-to-earnings (P/E) ratio of 30. Meanwhile, TripAdvisor (NASDAQ: TRIP) trades at a P/E of 60 and Priceline (NASDAQ: PCLN) stock is at 25.
However, one of the reasons that I’m not a fan of Priceline is that it has a lot of exposure to the weak economy in Europe. It also has a lot of work to do related to its foray in the restaurant space — where it purchased OpenTable last year.
Meanwhile, Expedia not only operates its key brand, Expedia, but also has Hotels.com and trivago.
In closing, the big theme is that Americans are traveling more. The strong economy, which includes falling unemployment, and cheap gas will continue to persuade people to travel more. Look for Starwood and Expedia to be two of the biggest winners.
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