What's Weighing on Hotel Stocks? - Industry Outlook

While outlook for the U.S. market remains favorable, the same isn't the case for most of the rest of the world, both developed and otherwise. This could start weighing on the sector's performance and should be taken into before investing in this space.

Below, we discuss some of these reasons and what investors may expect in the coming months and years:

Operating Margins Under Pressure: Though revenue per available room (RevPAR) has picked up since the industry started recovering in 2009, operating margins have yet to reach the industry peak of 2007 in the U.S. due to the spike in overall inflation. As a result of economic uncertainty, it is now estimated that peak levels will not be achieved anytime soon.

Lingering Uncertainty in Certain Regions: Despite immense growth potential, hoteliers are still apprehensive of several macroeconomic issues in international markets, like the ongoing austerity measures in Europe resulting from the sovereign debt crisis, and decelerating growth in Asia.

Moreover, a deteriorating political situation and a weak economy have flattened overall Latin American sales. The upcoming elections in Brazil have further added to the woes. Additionally, the situation in Argentina has gone from bad to worse as police strikes led to chaos across several cities in Dec 2013.

The troubles in Egypt and Syria have dampened the overall performance of the African and Middle Eastern region. Economic headwinds and political unrest have hampered growth in other parts of the world as well. Saudi visa restrictions due to the ongoing renovation in Mecca also remain a concern.

Uncertainty over the new government's policy in China is also an issue. The new leadership in China has asked government officials to curtail extravagance. Tighter government expenditure is expected to affect the food and beverage businesses of the hoteliers, particularly in the northern and western parts where the government is a major customer. Although tourism in India has recovered post elections, the controversial anti-government protests in Thailand have significantly hurt business.

Further, concerns about Ebola are increasingly hurting tourism in many African countries, like Kenya and South Africa. Reportedly, several international airlines cancelled flights to Ebola-affected West African countries, significantly affecting tourism at popular African destinations.

Health Care Reforms to Hurt Profitability: Federal health care legislation mandates employers to provide health coverage to full-time employees who log in more than 30 hours per week. With this provision coming into effect, it will increase costs for leading hoteliers.

There are some names in the space that induce our cautious-to-bearish outlook. Currently, there is no company carrying a Zacks Rank #4 (Sell). However, Extended Stay America, Inc. STAY has a Zacks Rank #5 (Strong Sell) mainly due to China's economic slowdown, liquidity fears and a crackdown on luxury spending.

Bottom Line

As you can see, there are some reasons to be pessimistic about the hotel industry. But what about investing in the space right now, are there opportunities for short-term investors?

Check out our latest Hotel Industry Outlook 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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