Hidden Value Or Hidden Bubble At Home Inns?

By Sham Gad | August 24, 2010 AAA

Home Inns and Hotels Management (Nasdaq:HMIN) develops, leases, operates and franchises a chain of economy hotels. Shares are trading for $41 a share, almost five-times book, and 41-times current earnings. With a slow economy hurting hotel occupancy rates, the lodging business might not be the best investment class today. Even more so for Home Inns, it's current valuation is clearly a sign of significant optimism being bestowed on the company by investors.

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Bite or Watch?
Amongst peer groups, Home Inns valuation is at the extreme top. Wyndham Worldwide Corp (NYSE:WYN), owner of the Super 8 chain of economy hotels amongst other brands, trades for 13-times earnings and yields a decent 2% along with a similar valuation for Intercontinental Hotels (NYSE:IHG). Home Inns lofty valuation can be explained by the fact that it operates in China. As of June 30, 2010 Home Inns operated 674 hotels in the People's Republic of China. By comparison Marriott International (NYSE:MAR) operates over 3,000 hotels under 14 brand names. And Marriott is currently recovering from net losses and trades for nearly 10-times book value. So, simply assuming Home Inns is in bubble territory based on a few metrics might not be as accurate in this case, when you examine the valuations across the hospitality industry. (For related reading, check out 5 Specialty Vacations And What They Cost.)

Not a Bargain
To be sure, shares in Home Inns are not cheap. You aren't getting a "50 cent dollar" or even a 90 cent dollar. But what you may be getting is a company with a tremendous opportunity for growth over the next decade or so. Currently, the shares are priced perfectly, and don't leave a lot of room for error. And if China's "bubble" bursts, then a company like Home Inns will get hit hard. If it does, that may be the best time to snap up these shares. The company's focus on economy hotels gives it a broader consumer base, although economy class patrons also tend to feel the effects of recessions harder.

Since 2003, Home Inns has grown from 10 hotels to 674 today. It's likely that the best share price gains have occurred over those past seven years. Nevertheless, this is a company that a long term investor could consider owning, if the share price experienced any short term volatility.

The Bottom Line
Exciting as the future of this company may be, investors may want to exercise a little patience and wait for a significantly better entry point. Of course that patience may come at the expense of further share price appreciation due to Mr. Market's favorable assessment of Home Inn's current prospects. (For more, see The Value Investor's Handbook.)

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