Morgan Stanley On Hotel, Leisure Sector: 2 Upgrades, 3 Downgrades

Analyst Thomas Allen has lowered his RevPAR estimation from 2.4 percent to 1 percent in 2017 and sees a fall of one percent in 2018 compared to earlier growth forecast of 1.5 percent. Although there is no change in economic growth factors, Allen pointed out other factors contributing to unfavorable pricing for lodging citing downward revisions in the last one and half years.

Related Link: Goldman Neutral On Lodging; Says Buy Marriott, Sell La Quinta

The brokerage sees a 40-basis-point drag from excessive supply and a 50-basis-point drag from alternative accommodations. Added to these are the discounted rates to combat OTAs and negotiated rates for corporate. These two factors could drag by 40 basis points and 30 basis points, respectively.

In a research note, Allen said, "As a result of these risks, we expect average multiples to de-rate from ~10.5x NTM EBITDA today to 10.0x by YE17. We see potential for further downside pressure from either re-pricing tools and/or the economy, which we reflect in our bear RevPAR forecasts of -2 percent/-5 percent in '17 / '18 (and bear 8x multiples)."

Although the brokerage downgraded the lodging sector from Neutral to Negative, Morgan Stanley is not ready to accord an underweight rating based on four factors:

• "Lodging is already unloved."
• Reacceleration of 3Q GDP.
• Surprisingly margins were resilient.
• There is still room for unit growth.

The following stocks are upgraded:

• Marriott upgraded to Overweight and boosted price target from $73 to $78.
• Choice Hotels assigned Equal-Weight rating while reducing the price objective from $48 to $47.

The following stocks are downgraded to Underweight:

• Hyatt Hotels Corporation H shares target price slashed from $49 to $46.
• DiamondRock Hospitality Company DRH stocks price target reduced from $10 to $8.
• Sunstone Hotel Investors Inc SHO shares target price reduced from $13 to $11.

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