CHICAGO, Sept. 2, 2011 /PRNewswire/ -- Today, Zacks Equity Research discusses the Hotels & Lodging, including Starwood Hotels and Resorts Worldwide Inc. (NYSE: HOT) and Marriott International Inc. (NYSE: MAR).
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A synopsis of today's Industry Outlook is presented below. The full article can be read at
http://www.zacks.com/stock/news/60114/Hotels+and+Lodging+Stock+Outlook+-+Sept.+2011
Since the U.S. market is somewhat saturated, hoteliers are exploring growth opportunities abroad. International markets offer greater potential based on the higher pace of economic growth that they currently enjoy.
The U.S.-based companies are targeting fast-growing emerging economies. Given the lackluster U.S. economic growth prospects, industry stalwarts such as Starwood Hotels and Resorts Worldwide Inc. (NYSE: HOT) and Marriott International Inc. (NYSE: MAR) are eyeing the Asia-Pacific and Latin American regions as they promise solid growth going forward.
The stellar performance from the Asia-Pacific region is expected to continue in the near future. Major growth markets within Asia-Pacific, China and India, remain more or less unaffected by the global economic turmoil and are enjoying rising economic growth rates. The availability of local capital is another positive factor.
China is set to bring about a recovery in global tourism, and by 2020 is expected to be the world's largest travel destination. Both Starwood and Marriott derive their second-largest revenue chunks from that country.
In the past, hotels in China were mainly occupied by Western travelers, but today more than 50% of the guests are Chinese. This is indicative of China's fast growing domestic travel market. Moreover, according to an analysis on the enrollment and travel trends of Starwood Preferred Guest members, around 100 million outbound travelers are expected to visit China by 2015, but the country has only a fraction of high-end hotels ready to serve them.
Apart from China, India is another hot spot for the Western hoteliers. India has a compelling investment proposition with its rising importance as a global business hub, where the demand for moderate-tier as well as upscale branded hotels will considerably outpace the supply for the next three to four years.
Moreover, Western hoteliers also find the built-cost to operating returns favorable. All these factors testify to the longest development pipeline that the hotel companies have in India. We believe, Marriott and Starwood should benefit from their global pipeline.
Metrics Analysis
In evaluating hotel companies, we pay close attention to changes in average daily room rate (ADR) to figure out the likely pace of improvement in the sector.
A key operating metric in the lodging industry is RevPAR (revenue per available room), which is derived by multiplying the occupancy percentage of a hotel over a given period by ADR over that same period. Changes in either occupancy or ADR will impact RevPAR, but with different implications for bottom-line profitability.
Despite the halting nature of the U.S. economic recovery, hotel occupancy percentages have been improving. However, declining occupancy percentages during the recession prompted some hotel owners to slash room rates in an effort to woo visitors. This tactic will likely have a material negative impact on the business in the long run, for a number of reasons.
First, increase in occupancy is accompanied by escalating operating expenses. For every room that is filled, there are additional costs such as housekeeping, laundry and utilities that must be borne. Margins are compressed when room rates decline and variable operating expenses increase. Changes in ADR, however, affect almost entirely the bottom line.
Second, and more importantly, cuts in ADR will be difficult to recoup when the operating environment eventually improves. After slashing room rates in an effort to fill up rooms, attempts to restore these to previous levels are likely to be met with significant resistance from clients. The ability to benefit from an improving economy will thus be delayed.
Finally, the ability of lodging companies to sustain room rates will have a significant impact on their capability to weather any kind of economic uncertainty. By keeping an eye on changes in ADR, investors can gain some insight into companies that are best poised to benefit with the economic revival.
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