The hotel industry experienced strong gains in 2014, according to new data from STR, Inc. Hotel occupancy rose significantly last year, buoyed by an improving job market and lower fuel prices. Additionally, new projections from PwC predict that the sector is poised to gain further this year.
Stellar 2014 Performance
During 2014, the U.S. hotel industry’s occupancy increased 3.6% to 64.4%. Additionally, average daily rate (ADR) went up 4.6% to $115.32. During the same period, revenue per available room (RevPAR) was up 8.3% to $74.28.
Among the leading 25 markets, 12 posted RevPAR gains in double digits. Among the leaders were Atlanta, Georgia, Denver, Colorado and Nashville. RevPAR increased by 13.1% to $62.66, 16.2% to $84.86 and 19% to $84.20, respectively.
Additionally, two markets experienced ADR increases in double digits. These are San Francisco/San Mateo, California and Nashville where ADR increased 10.9% and 12.8% to $207.81 and $116.86, respectively. The highest occupancy gains were experienced by Atlanta, Georgia with an 8.1% increase to 68.2%. Occupancy increased by 6.5% in Denver to hit 75.4%.
Bullish 2015 Projections
PwC’s lodging forecast for 2015 predicts faster gains in ADR for 2015. These gains in turn will power RevPAR growth during the year. The research firm expects 7.4% growth in RevPAR during 2015. Industry occupancy is projected to increase to the highest in more than 30 years. This is why more than 80% of RevPAR growth during the year is expected to be fuelled by higher ADR.
Last year, individual and group travel experienced gains. Strong lodging demand, estimated at 2.6% is expected to be matched by adequate growth in supply this year of 1.5%. While this is lower than the long-term average of 1.9%, it is a significant improvement from 2014’s figure of 0.9%.
This combination will result in an increase in pricing power of hotels. Even as the premium price segment is expected to benefit most from this trend, occupancy levels in the low price segment is expected to pick up. This is because increases in prices at premium properties will power demand for low price offerings.
Our Choices
Below we present three stocks which will gain from these trends, each of which also has a good Zacks Rank.
Choice Hotels International Inc. (CHH) along with its subsidiary companies is an operator of hotel franchises across the world. Its franchises include the Clarion, Sleep Inn, Comfort Suites, Comfort Inn brand names. Occupancy rates and RevPAR of the company’s properties have constantly risen over the past year, which reflects the increased leisure travel due to the improving U.S. economy.
Choice Hotels International holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 12.5%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 25.36, lower than the industry average of 39.40.
Intercontinental Hotels Group plc (IHG) is an owner, manager and franchiser of hotels and resorts across the world. Intercontinental Hotels was a franchiser, lesser, manager and owner of around 4,700 hotels in nearly 100 countries as of Jan 28, 2015. Third quarter 2014 was its best in terms of RevPAR in the last two years, which increased 8.7% in the U.S.
Apart from a Zacks Rank #2 (Buy), Intercontinental Hotels Group has expected earnings growth of 15.2%. It has a P/E (F1) of 21.88x.
Marriott International, Inc. (MAR) is a leading worldwide hospitality company, focusing on lodging management and franchising, after the spin-off of its timeshare business into a publicly traded company in Nov 2011. The company is progressing well on the back of a growing North American business, significant international exposure and an aggressive buyback strategy.
Marriott International holds a Zacks Rank #2 (Buy) and has expected earnings growth of 18%. It has a P/E (F1) of 24.58x, lower than the industry average of 39.40.
The U.S. economic recovery is creating more opportunities for business travel. Travel for leisure is poised to increase further, given the slump in oil prices and an improving labor market. This is why you should add these stocks to your portfolio.
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