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Lodging Stocks In 2010
Fundamentals in the lodging sector are expected to remain weak in 2010, as industry metrics continue to decline, and new supply ordered during the glory days hits the market at just the wrong time.
Investors ignored all these fundamentals in 2009, with stocks in the lodging sector roaring ahead with the market off the trough of March, 2009. Many stocks doubled or even tripled for some of the more levered names.
This performance will not be as easy in 2010, as that bounce occurred right after an extremely oversold condition in the market, where many investors were panic-selling in reaction to the restriction of credit and upcoming maturity schedules of debt.
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The Fundamentals
Fundamentals are still terrible in the industry. Revenue Per Available Room (RevPAR) fell 19% in 2009, and analysts are looking for a decline of 4% in 2010. Hotel occupancy rates only averaged 55.4% in 2009, and are expected to be flat in 2010, according to Smith Travel Research.
The smaller decline in RevPAR is confirmed by company reports. Marriott International, Inc (NYSE:MAR) said in early December, 2009 that its RevPAR outside North America would not be as bad as expected in the fourth quarter of 2009. Previous guidance was for a decline of 16-18% on a year over year basis, and the company now expects a decline of 14-16%.
Secure Investments?
In the commercial mortgage backed securities (CMBS) market, securities backed by lodging cash flows have the highest delinquency rate of any commercial real estate sub sector, at 5.8%, according to Fitch. Fitch also projects that the value of lodging properties will fall 50% from peak levels. Supply is also expanding as units financed during the easy money era several years back hit the market. Supply grew 3% in 2009, and will increase by 1% in 2010. During its third quarter of 2009 earnings report, Choice Hotels International, Inc. (NYSE:CHH) said that domestic new unit growth would be 4% in 2009.
The industry is dealing with these issues with cost cutting. InterContinental Hotels Group plc (NYSE:IHG) said late in November, 2009 that it cut costs by $80 million in 2009, and will cut another $65-70 million by the end of 2010.
Steve Holmes, the CEO of Wyndham Worldwide Corporation (NYSE:WYN), put it best during a recent company conference call. "While it appears that the worst is behind us and we're certainly expecting industry improvement next year, we do believe there will be a significant restructuring of the lodging industry over the next 12-18 months."
The Bottom Line
The lodging industry still has a long way to go, as it suffers from both the cutbacks in business travel and a newly frugal consumer. Stock gains should be much harder to come by in 2010 without substantial evidence of a recovery. (For more, see Travel Smart By Planning How You'll Pay.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
Investors ignored all these fundamentals in 2009, with stocks in the lodging sector roaring ahead with the market off the trough of March, 2009. Many stocks doubled or even tripled for some of the more levered names.
This performance will not be as easy in 2010, as that bounce occurred right after an extremely oversold condition in the market, where many investors were panic-selling in reaction to the restriction of credit and upcoming maturity schedules of debt.
IN PICTURES: Learn To Invest In 10 Steps
The Fundamentals
Fundamentals are still terrible in the industry. Revenue Per Available Room (RevPAR) fell 19% in 2009, and analysts are looking for a decline of 4% in 2010. Hotel occupancy rates only averaged 55.4% in 2009, and are expected to be flat in 2010, according to Smith Travel Research.
The smaller decline in RevPAR is confirmed by company reports. Marriott International, Inc (NYSE:MAR) said in early December, 2009 that its RevPAR outside North America would not be as bad as expected in the fourth quarter of 2009. Previous guidance was for a decline of 16-18% on a year over year basis, and the company now expects a decline of 14-16%.
In the commercial mortgage backed securities (CMBS) market, securities backed by lodging cash flows have the highest delinquency rate of any commercial real estate sub sector, at 5.8%, according to Fitch. Fitch also projects that the value of lodging properties will fall 50% from peak levels. Supply is also expanding as units financed during the easy money era several years back hit the market. Supply grew 3% in 2009, and will increase by 1% in 2010. During its third quarter of 2009 earnings report, Choice Hotels International, Inc. (NYSE:CHH) said that domestic new unit growth would be 4% in 2009.
The industry is dealing with these issues with cost cutting. InterContinental Hotels Group plc (NYSE:IHG) said late in November, 2009 that it cut costs by $80 million in 2009, and will cut another $65-70 million by the end of 2010.
Steve Holmes, the CEO of Wyndham Worldwide Corporation (NYSE:WYN), put it best during a recent company conference call. "While it appears that the worst is behind us and we're certainly expecting industry improvement next year, we do believe there will be a significant restructuring of the lodging industry over the next 12-18 months."
The Bottom Line
The lodging industry still has a long way to go, as it suffers from both the cutbacks in business travel and a newly frugal consumer. Stock gains should be much harder to come by in 2010 without substantial evidence of a recovery. (For more, see Travel Smart By Planning How You'll Pay.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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