Hotel Stocks Have Been Laggards — So Why Should They Go Up Now?
As the equity markets continue to exhibit broad-based gains and as the
economy is showing more signs of life, many investors are left wondering which
sectors will continue to offer decent returns in the months and quarters ahead.
In my view, the hotel/lodging stocks continue to offer potential for reward due
to favorable developments in both supply and demand.
Demand
Starting at the beginning of next month, American consumers will see an
increase in their disposable incomes due to the tax cuts that were recently
enacted by the federal government. This improvement in household finances will
be broad-based, as the tax cuts include across the board reductions in marginal
rates and a more inclusive lowest tax bracket. Moreover, the current backdrop of
low interest rates (lower debt servicing costs) and higher equities should mean
that a substantial portion of this increase in disposable income will go
towards discretionary consumer outlays. In fact, most estimates for
discretionary consumer spending–even the most most bearish–are now being
upwardly revised for the months ahead. And a significant portion of this
increase in spending will most likely benefit the domestic lodging sector.
Why Domestic Hotel Companies?
One of the many effects of a weaker US dollar is that the purchasing power of
international visitors is now greater in the US, as travel related expenses in
the US are now less than they have been in years, relative to those in other
countries, making the US a more attractive destination for vacationers. On the
flipside, US consumers’ purchasing power has now decreased as a result of a
weaker greenback, and, therefore, domestic travel is a more cost-effective
option.
Supply
Due to the especially trying economic environment of the last three years,
the hotel industry has virtually halted the creation of new hotels and
additional rooms (supply). Specifically, last year, new room growth rates for
the US fell to 7-year lows at 1.6%–versus 4.3% in 1999. This limited supply
growth will give hotel/lodging companies, such as Starwood
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PowerRating) and Hilton
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PowerRating), better pricing power as demand picks up, which, in turn, should
boost profit margins in the quarters ahead.
