The U.S hotel industry posted a stellar performance in 2017 and experts believe that it will break more records through next year. Demand for hotel rooms is burgeoning, with revenue per available room (RevPAR) increasing for a whopping 94 months in a row.
A strong economy bolstered by record consumer spending levels was cited as the primary reason for the impressive performance. Such encouraging factors will help the hotel industry gain traction in the near future, while GOP tax cuts will spur an increase in leisure as well as hotel development. Given the positives, doubling down on the hottest hotel stocks seems judicious.
Record-Breaking Growth Projected for Hotel Industry
As per hotel research firm STR and Tourism Economics, the hotel industry is projected to see a 0.3% rise in occupancy in 2018. Average daily rate (ADR) and RevPAR are expected to rise 2.4% to $129.77 and 2.7% to $85.82. While the luxury and independent segments will witness the largest increase in occupancy this year, Independent hotels are expected to post considerable growth in ADR (+2.5%) and RevPAR (+2.9%).
As per the report’s initial forecast for 2019, the hotel industry is projected to report a 0.1% increase in occupancy, 2.3% growth in ADR to $132.81 and 2.4% rise in RevPAR to $87.89. RevPAR is expected to be the maximum at the Luxury segment.
All the three key metrics are poised to scale north this year and the next as demand continues to outpace supply.
| Outlook | 2018 Forecast | 2019 Forecast |
| Demand | +2.3% | +2.0% |
| Supply | +2.0% | +1.9% |
(Source: STR/Tourism Economics)
Needless to say, occupancy increased 0.9% last year and ADR rose 2.1% to almost $127, driving RevPAR by 3%. All the metrics surpassed projections and touched record levels, per the report. Houston, Texas, in the meantime, reported the highest spike in RevPAR, thanks to displaced residents seeking rooms due to hurricane Harvey. Meanwhile, Nashville, Tennessee, posted the largest rise in ADR.
Stronger GDP — A Key Catalyst
The hotel industry is in a solid position moving through the next year, particularly due to a stronger economy powered by record consumer spending levels. The nation’s GDP increased at a seasonally adjusted annual rate of 2.6% in the final three months of 2017 following gains in the previous two quarters of more than 3%, per the “advance” estimate released by the Bureau of Economic Analysis. This marked the economy’s strongest stretch of growth since the expansion started in mid-2009.
The economy was driven by solid consumer spending in the fourth quarter. The main engine of the economy grew at 3.8% over the quarter after a 2.2% gain in the third quarter. Consumer outlays, thus, registered the fastest pace of growth in the fourth quarter in almost two years. Spending, in fact, climbed 0.4% in December, notching the highest increase in household buying since 2011.
Consumers are, largely, benefitting from a low unemployment level and rise in income. Jobless rate remained at an ultra-low level of 4.1% and workers’ pay increased 2.5% from December 2016 to December 2017 (read more: 5 Winning Stocks for Best Stretch of Growth Since '09).
Tax Overhaul Policy to Benefit Hotel Industry
The GOP tax cuts are a blessing in disguise for the hotel industry. President Trump’s new tax plan will reduce individual tax rates as the headline-grabbing move lowers corporate tax rate from 35% to 21%. The tax cut will be implemented this year, instead of being delayed until 2019 (read more: GOP Passes Landmark Tax Bill: Best & Worst for Stocks).
On an individual level, tax cuts will boost the paychecks for many workers and will result in higher discretionary income for leisure travel. This in turn will boost revenues for hoteliers. Major hotels, in the meantime, will advantage from the corporate tax cut and spend the extra money on business development and growth in America.
4 Top Picks
It will, therefore, be prudent to invest in fundamentally sound hotel stocks that can make the most of the bullish run. We have, thus, selected four such companies that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy).
The strength in the Hotels and Motels space is also confirmed by its solid Zacks Industry Rank in the top 27%. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1.
Marriott International, Inc. MAR operates, franchises, and licenses hotels and timeshare properties worldwide. The company is headquartered in Bethesda, MD. The stock has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings increased 2.7% in the last 90 days. The company’s expected growth rate for the current year is almost 11%, higher than the industry’s rally of 3.1%. Marriott has outperformed the broader industry over a year (+75% vs +51%).
Hilton Worldwide Holdings Inc. HLT owns, leases, manages, develops, and franchises hotels and resorts. Hilton is headquartered in McLean, VA. The company has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for its current-year earnings advanced 0.5% in the last 90 days. The stock’s expected growth rate for the next quarter is a solid 26.3%. Hilton has outperformed the broader industry in the last year (+51.6% vs +51%).
Choice Hotels International, Inc. CHH, together with its subsidiaries, operates as a hotel franchisor worldwide. The company is based in Rockville, MD. The stock has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings increased 1.4% in the last 90 days. The company’s expected growth rate for the current year is 16.1%, higher than the industry’s gain of 3.1%. Choice Hotels has given a stellar return of 47.7% over a year. You can see the complete list of today’s Zacks #1 Rank stocks here.
InterContinental Hotels Group PLC IHG – a Zacks Rank #1 company – owns, manages, franchises and leases hotels worldwide. The company is headquartered in Denham, the United Kingdom, while its office in America is in Dunwoody, GA in Greater Atlanta. The Zacks Consensus Estimate for its current-year earnings rose 7.9% in the last 90 days. The company’s expected growth rate for the current year is 30%, way higher than the industry’s rally of 3.1%. InterContinental Hotels has yielded a sturdy return of 39.1% in the last year.
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