Telsey Analysts Mixed But Opportunistic On Lodging Stocks

• Most lodging sector stocks have been under pressure over the past one month.
• Telsey’s David Katz initiated coverage on lodging stocks with a mixed, opportunistic view.
• Katz believes that the lodging cycle is in its later stages, with occupancy rates approaching their maximum levels and a declaration in ADR growth by 2017.

While there is no debate that the lodging cycle has crossed its midpoint, there are varied views on how long the cycle will last, analyst David Katz said. He added, “We note that the past two cycles ended abruptly by significant events. Nonetheless, we do not foretell a dramatic downturn in the near-term, but note that our view tempers our approach to valuations.”

The companies covered were:

• Belmond Ltd BEL: Initiated with an Underperform rating and a price target of $8
• Choice Hotels International Inc CHH: Initiated with a Market Perform rating and a price target of $52
• Hyatt Hotels Corporation H: Initiated with a Market Perform rating and a price target of $47
• Hilton Worldwide Holdings Inc HLT: Initiated with an Outperform rating and a price target of $28
• InterContinental Hotels Group PLC (ADR) IHG: Initiated with a Market Perform rating and a price target of $36
• Marriott International Inc MAR: Initiated with a Market Perform rating and a price target of $72
• Marriott Vacations Worldwide Corp VAC: Initiated with a Market Perform rating and a price target of $64
• Wyndham Worldwide Corporation WYN: Initiated with an Outperform rating and a price target of $97

This is the reason that Telsey’s price target for Hyatt Hotels is below the consensus target of $58. Some companies have a capital light model, which offers “a suitable core long-term holding, Katz commented, while naming Choice Hotels International and InterContinental Hotels Group.

Katz noted that some catalysts existed that could lend upside to stocks, while adding that views of the timeshare business climate no longer remaining positive appeared to be premature, creating opportunity.

The analyst said that Marriott Vacations Worldwide was at “a strategic pivot point” in its capital investment strategy. While this seems to be slightly overdone in the stock, it “tempers our enthusiasm somewhat for the shares.”

Some companies continue to manage their overall business structures, presenting catalysts. Katz named Hilton Worldwide Holdings, saying that the company is likely to spin its timeshare business as well as its real estate.

Although the acquisition of Starwood Hotels by Marriott International would have significant integration challenges, it offers long-term opportunity for accretion.

Belmond appears to be in the very early stages of a strategic shift, and has a stronger management team than it has ever had. The analyst added, however, that there is a significant “burden of proof” in view of the company’s past performance.

Katz said that the recent weakness in the shares of Wyndham Worldwide created a compelling opportunity, pointing out that the company’s timeshare business had proved resilient, management had an excellent capital allocation strategy, and there were prospects of boosting the higher-value hotel business.