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Terror worries have hotel stocks spooked
With relatively high prices and optimistic projections, recent attacks have made many hotel stocks look risky. But 3 look like relatively safe places to stay.
By Robert Walberg
The intensified terrorism threat has had a dramatic effect on stocks both here and abroad. Whether investors have overreacted to the recent bombing in Spain and the Israeli assassination of a Hamas leader is debatable. But they clearly fear that a new wave of terrorism could derail the global economic recovery by compelling businesses and consumers to rein in spending.
Some sectors are more vulnerable to this risk than others. Lodging is one such industry, as nothing puts a damper on vacation plans like the thought of a car bomb ramming your hotel.
Up by more than 4% for the year just a couple of weeks ago, the hotel sector is now down almost 4% on the year.
Present is bright, future uncertain
The violent swing comes at a time when the industry should be reveling in a spring-break related boom. From my own observation of several hotels in Los Angeles and Palm Springs, where Im vacationing, travelers have yet to be deterred by world events. The chains -- especially luxury providers such as Four Seasons Hotel (FS, news, msgs) and Fairmont Hotels & Resorts (FHR, news, msgs) -- report high occupancy and room rates, which should impact bottom lines this quarter.
However, the market discounts the future, and right now it is less concerned about the first-quarter outlook than it is about the second half of this year. If the world endures yet another rash of terrorist activity, its almost certain that tourism and business travel will deteriorate. Goodbye high room rates, hello discounting.
So who could blame investors for fleeing the group? Earnings estimates for the lodging industry are based on the assumption that occupancy and rate trends will continue at strong current rates. At present, the Street expects the group to achieve exceptional earnings growth of 16.5% in 2004.
Those assumptions are now under the gun, as is the industrys premium price-earnings multiple.
Valuations, even after the recent slide, remain uncomfortably high. The average price/sales ratio of the eight leading chains is an eye-catching 3.2. The groups forward price/earnings ratio also is a relatively high 32.9. Admittedly that figure is inflated by the very high multiple assigned Prime Hospitality (PDQ, news, msgs), but even backing that figure out, the rest of the group averages a forward P/E of 26.9. For a volatile industry with an uneven earnings track record, these are lofty.
Steady, impressive earnings growth in recent quarters, coupled with a preponderance of positive earnings surprises and a strong global economic recovery, explains the rich prices investors have been willing to pay. However, for the industry to maintain its momentum, investors must remain confident that the recent earnings and economic trends will continue.
Without that confidence, these stocks could fall and fall hard.
Four Seasons looks risky
Which stocks are most vulnerable to additional price weakness? Though the Four Seasons chain is a personal favorite for its top-of-the-line service and outstanding properties, the stock trades at 8.9 times trailing 12-month sales and 32.4 times current year earnings projections. That makes it a potential landmine for investors.
Note that the stock lost nearly 50% of its value after the Sept. 11 attacks. Coincidentally, Four Seasons now trades at about the same price it was at preceding that event-related decline. Technical investors will also point out that Four Seasons recently broke below its 150-day moving average for the first time in nearly a year -- not a good sign.
Other hotel stocks with considerable downside risks include Fairmont Hotels & Resorts, Prime Hospitality and Choice Hotels International (CHH, news, msgs). Fairmont, like the Four Seasons, is a luxury chain with a relatively limited number of properties, less than 80 worldwide. Also like the Four Seasons, the stock sports uncomfortably high price/sales and price/earnings multiples while displaying deteriorating price momentum. Not a good combination.
The other two chains target the average, middle-class traveler. While both stocks have exhibited impressive relative strength, even during the sector retreat, the clientele of these companies are generally more vulnerable to an economic slowdown. Choice Hotels price/sales ratio of 3.8 is among the groups highest, while Primes forward P/E of 75.3 is gaudy. Of these three, Choice held up best in the wake of Sept. 11, though all of them were hit hard.
3 safer places to stay
While all lodging stocks are likely to fall if the threat of terrorism continues to grow, investors seeking relative value and safety within the industry should consider the following three stocks: Marriott International (MAR, news, msgs), The Marcus Corp. (MCS, news, msgs) and Orient-Express Hotels (OEH, news, msgs).
Marriott is the most recognizable of the bunch, as the company has more than 2,700 properties worldwide. The stock has come under heavy selling pressure in recent sessions and its technical picture is nothing to get excited about. But Marriott offers the combination of growth and value thats hard to come by not only in the sector but in the market overall. Barring a big negative surprise, the company is expected to grow earnings by a very manageable 15% over the next few years. At current prices, investors arent paying too much for that growth, either, as the stock trades at 1.04 times trailing sales and 16.9 times estimated earnings. Throw in an industry-high return on equity of 12.8% and a nice little dividend yield of 0.74% and Marriott looks like a comfortable place for lodging investors to stay.
Marcus is an oddity in that the company manages 46 movie theaters as well as 200 hotels. Its hotels are the Baymont Inns & Suites and the Woodfield Suites. Most are scattered throughout the Midwest. Given the limited number of low-profile properties, the chain is less likely to be directly affected by the threat of terror. Meanwhile, its movie business is a good balance to its hotel properties, as the former typically holds up well during periods of sluggish economic growth. Marcus valuations also are reasonably palatable, while its dividend yield of 1.3% is attractive.
Finally, we turn our attention to Orient-Express. A luxury chain with a limited number of properties scattered around the world, Orient-Expresss stock is more vulnerable to an event or property shock than that of Marriott or Marcus.
However, its high-end customers are less likely to be effected by the economy and its discounted valuation -- especially among the luxury companies -- makes it an attractive intermediate- to long-term play. Both factors also should reduce the stocks downside risk.
Hopefully, world events will calm down, the terror threat will dissipate and we can all get on with life as normal -- which for me right now means sipping a Bloody Mary at poolside. However, as my high school teacher used to say, forewarned is forearmed, and if youre invested in the lodging industry, now might be a good time to reduce risk by emphasizing value over growth.
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