US Hotel Industry Holding Up Well Despite Global Headwinds

The U.S. hotel industry cycle appears to be moderating to historical norms, coming off years of accelerated growth that started in 2010 following the Great Recession.

On the one hand, apart from softening occupancy levels, negative currency translation, pockets of geopolitical instability and economic slowdown raise concerns. On the other, a steady rise in business and leisure travel on the back of an improving economy and positive employment numbers along with strong investor appetite thanks to higher transaction volumes is spreading cheer across the industry.

Going forward, we expect that the lodging cycle will align with the broader business cycle. Moreover, hoteliers have been moving from owning real estate to franchising their brands and services to counter economic volatility better.

Does this mean that the hotel industry is a bowl of cherries? Not really.

What’s Hurting the Hoteliers?

Hoteliers have been focusing on renovation and digital and marketing initiatives to boost traffic and capitalize on growing tourism numbers. However, to do that, the steep costs incurred by leading hoteliers are taking a toll on profits. Further, online travel agents like Expedia Inc. (EXPE - Free Report), TripAdvisor (TRIP - Free Report) and The Priceline Group Inc. (PCLN - Free Report) are limiting the pricing power of these brands.

Meanwhile, the slowdown in China, lingering uncertainty in various international markets, and increased supply are likely to continue to pose headwinds. Particularly in Europe, economic/political conditions are expected to be challenging post-Brexit.

Another major threat comes from home sharing companies, like Airbnb, Inc., which offer a digital service allowing travelers to book homes at holiday destinations. With lower overhead costs and far less regulations than what hotel companies have to comply with, these firms have made steady inroads into the industry and are grabbing share from giants like Marriott International, Inc. (MAR - Free Report) and Hilton Worldwide Holdings Inc. (HLT - Free Report) .

The Positives

Nonetheless, as per the most recent forecast from Smith Travel Research (STR), a leading information and data provider for the lodging industry and Tourism Economics, the U.S. hotel industry is projected to experience continued growth through 2017, albeit at a slower rate.

For full-year 2016, the U.S. hotel industry is predicted to report flat occupancy growth, and a 3.2% rise in average daily rate (ADR). Revenue per available room (RevPAR) is also anticipated to go up 3.2%, with higher ADR being the key RevPAR growth driver.

Moreover, the Baird/STR Hotel Stock Index, which comprises 20 of the largest market capitalization hotel companies publicly traded on a U.S. exchange and attempts to characterize the performance of hotel stocks, is up 0.4% year to date.

Additionally, according to STR, RevPAR at U.S. hotels was up 5% year over year for the week ended Nov 12, 2016.

Thus, as hoteliers strive to enhance value and competitiveness, industry-best practices such as sustainability, brand refreshment and increased visibility through technological innovation and social networking – especially among the millennials – will remain the priorities.

Meanwhile, Marriott’s acquisition of Starwood Hotels & Resorts Worldwide Inc. is being viewed as a move to combat the rising threat from online travel agents and home sharing companies. Other hoteliers like Hyatt Hotels Corp. (H - Free Report) and Wyndham Worldwide Corp. (WYN - Free Report) are also investing in home sharing start-ups to combat Airbnb.

Notably, all the three companies -- Marriott, Hyattand Wyndham– carry a Zacks Rank #3 (Hold). 

Zacks Industry Rank – Neutral Outlook

Within the Zacks Industry classification, we rank all the 260 plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank.

As a guideline, the outlook for industries in the top 1/3rd of all Industry Ranks or a Zacks Industry Rank of #88 and lower is 'Positive,' the middle 1/3rd or industries with Zacks Industry Rank between #89 and #176 is 'Neutral' and the bottom 1/3rd or Zacks Industry Rank of #177 and higher is 'Negative.'

The Zacks Industry Rank for the Hotels & Motels industry is currently #156. This puts the industry in the middle third of all industries, corresponding to a neutral outlook.

Earnings Trends

The Hotels & Motels industry falls under the broader Consumer Discretionary sector.

As of Nov 17, 94.3% of the Consumer Discretionary companies in the S&P 500 index reported their Q3 results. The growth rate for earnings and revenues is 7.6% and 12.2%, respectively. Moreover, the beat ratios for this sector are noteworthy (72.7% for earnings and 45.5% for revenues).

Meanwhile, for 2016, both earnings and revenues for the sector are expected to rise 4.8% and 12.1%, respectively.

However, most of the hoteliers’ top-line growth was weaker than expected in the third-quarter 2016 earnings season and showed sequential RevPAR growth deceleration.

For more details about earnings for this sector and others, please read our ‘Earnings Trends’ report.

Conclusion

On the whole, though pockets of geopolitical instability and economic slowdown continue to weigh on sentiment, hoteliers are cautiously optimistic heading into 2017.