Hotel Industry Strengthens, Risks Lower: Time to Invest? - Industry Outlook

The hotel industry has come a long way since the global financial crisis. Sales have bounced back and are very strong, especially in the domestic market. However, worries persist about patches of economic and political uncertainty around the world. Additionally, the slow pace of the housing market recovery also remains a concern.

On the brighter side, however, there are plenty of reasons to be optimistic about the broader hotel industry over both the short and long terms. Below, we discuss some of these key reasons and what investors in the hotel sector can look forward to in the coming months and years:

The gradual recovery in the broader economy has boosted the hotel industry as demand is picking up for both leisure and transient business travel. With limited supply and strong demand, room rates are seeing upward movement. According to Hyatt Hotels Corporation (

) and Hilton Worldwide Holdings Inc. (

), the supply-demand environment in the U.S. is favorable with healthy demand growth outpacing supply growth which is still below the long-term average. This would lead to rate increases, thereby driving revenue per available room (RevPAR) higher. In fact, Smith Travel Research (STR) expects the sector's demand growth in 2014 to be 4.3% in the U.S. with only a 0.9% increase in supply.

System-wide occupancies in North America appear to be pretty steady and above the prior peak achieved in 2006 following the gradual economic improvement.

With the growth in the economic sector, coupled with easier lending standards and improving travel and tourism industry, hotel companies are well poised to grow. North America is still the largest market for Starwood Hotels & Resorts Worldwide Inc. (

) where it plans to open about one-third of its hotels, expecting 2014 to be yet another year of robust growth in this region.

International Expansion: Major hoteliers are exploring growth opportunities abroad, especially in the emerging markets. These international markets offer greater potential due to higher pace of economic growth. The demand for hotels in these markets is greater than that in the U.S.

A number of U.S.-based hoteliers are targeting the unsaturated markets of Asia-Pacific, Brazil, Russia and Africa. Within Asia, China, despite the economic slowdown, promises lucrative growth opportunities with visits expected to increase substantially toward the end of 2014. In fact, China is a major revenue contributor to both Starwood Hotels and Marriott International, Inc. (

). The flow in the Chinese tourism industry, propelled by increased discretionary income and relaxed visa restrictions from popular tourist destinations, is anticipated to further increase in 2014 and beyond.

Apart from China, India is becoming a hot spot for western hoteliers with its emergence as a global business hub. Although economic growth rates are slightly lower than China, India has great long-term growth potential as a tourism market. Major players in the industry are also eying high-potential countries such as Turkey, United Arab Emirates (UAE) and South Korea, which offer strong infrastructure.

Though growth in Brazil lagged in the first half of 2013 mainly due to slowdown in tourist arrivals, the Brazilian government focused on improving the country's infrastructure to efficiently manage the surge in tourism and proportionate increase in the demand for hotel rooms during the FIFA World Cup held last summer. Brazil is scheduled to host another mega sporting event -- The Summer Olympics in 2016 -- which will further boost tourism.

In Europe, too, the scenario is improving. In fact, select markets in Southern Europe, which were hard hit by the recession, are witnessing growth. The bullish trend can be validated by Starwood's system-wide occupancy data for the first nine months of 2014, which was an impressive 68.1% in Europe. Other major players like Hilton Worldwide, Choice Hotels International Inc. (

) and Wyndham Worldwide Corporation (

) are also targeting the European market.

Hotel companies are diligently working on guest satisfaction to strengthen their positions in the highly competitive environment through brand conversion and re-modeling. In fact, brand perception is likely to have a growing influence in the large mass-market segment. With the market becoming increasingly saturated, hotels will need to increasingly differentiate themselves.

Brands that can offer something uniquely compelling are likely to grab market share and the ability to innovate will be a key driver of success. Therefore, many leading hoteliers like Starwood Hotels, Marriott International, Belmond Ltd. (

), Hyatt Hotels and The Marcus Corporation (

) are firing on all engines to make their brands more relevant in today's environment.

Digital innovations and social media are starting to play an increasingly important role in the hotel industry. Social media can enhance a brand's prospects by connecting directly with guests, which in turn can lead to increased loyalty and market share. Social media sites like Facebook, Twitter and TripAdvisor Inc. are increasingly playing an important role in helping travelers select a hotel.

Moreover, a higher number of hoteliers are using apps to help guests manage their bookings, interactive maps/GPS as well as reward programs. Keeping up with the latest technology is no longer an option but a necessity for the hotel industry.

Many companies are setting up analytics tools to understand consumer preferences -- and deliver a differentiated experience -- which could eventually motivate customers to visit frequently, stay longer and spend more. Loyalty programs are a major part of the brand experience and hoteliers are continuously reengineering loyalty programs to provide a more rewarding experience to visitors.

Currently, Marriott Vacations Worldwide Corp. (

) sport a Zacks Rank #1 (Strong Buy). However, Marriott, Hilton Worldwide, Intercontinental Hotels Group plc (

) and Choice Hotels have a Zacks Rank #2 (Buy).

Despite being Zacks Rank #3 (Hold) stocks, we are optimistic about Starwood, Hyatt Hotels and China Lodging Group, Limited (

), given the momentum in their underlying businesses and based on the optimistic outlook for 2015.

We firmly believe that the lodging sector has overcome the dark days and is on the path to recovery. This makes it a worthy investment proposition for 2015 buoyed by the ongoing economic recovery as well as the low supply–high demand scenario in the industry. Although risks have continued to ease out, near-term risks related to tepid recovery in the domestic housing sector continue to remain an overhang.

As you can see, there are plenty of reasons to be optimistic about the hotel industry for the long haul. But what about investing in the space right now?

Check out our latest

here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector of the economy now.

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