Hospitality was one of the hardest-hit sectors in Europe when the COVID-19 pandemic caused tangible shocks worldwide. Revenue per available room (RevPAR) dropped by over 90% during the peak of lockdowns. And despite signs of recovery in the second half of 2020, the YoY RevPAR and occupancy rate decline remained high.
But three years later, the picture has completely changed. Hotels are now on a path to solid recovery and rebound. Early this year, European hotels had a 20% RevPar increase from pre-pandemic levels, driven by higher average daily rates (ADRs). Meanwhile, occupancy rates were still lower than in 2019, but the gap narrowed to 1.9 basis points.
European travel habits continue to pick up amid softer consumer discretionary spending. A recent survey shows that 72% of American and European travelers will take a trip this autumn and winter, compared to 55% in 2022. As such, pent-up travel demand may maintain upward momentum as border reopenings and resilient spending persist.
This article will discuss the factors driving hotel growth aside from the pent-up demand for leisure and business travel. We will highlight the two stocks to help investors find the optimal choice and balance risks and rewards.
Investors must consider hotel stocks despite various climatic hazards, such as rising inflation and interest rates, as the year draws to a close. There are also more growth drivers to cope with elevated prices and maintain discretionary spending. Hence, hotel fundamentals may bounce back, leading to attractive investor returns.
Hybrid work prevalence
The pandemic has changed the business and labor market landscape. Although it has put a lot of businesses into the gutter, it also opened a fresh start for many, especially startups. It allowed companies to operate and expand, even those without brick-and-mortar.
Most importantly, it became an opportunity for employees and business owners to work even in the comfort of their homes. Hence, it became one of the top considerations for employees to love or leave their jobs.
Three years later, the Great Resignation has accelerated and is just about to peak. Remote work remains crucial for businesses to maintain employee retention. But apart from that, remote work has become instrumental in driving travel growth. In a recent survey, two-thirds of respondents disclosed that remote work allowed them to travel more often. Meanwhile, 27% increased their travel duration.
Europe remains the top destination
Europe has been and will always be one of the top travel destinations in the world. With respect to search traffic, countries like the US, France, and Spain are among the top ten. On booking.com, European countries have among the highest website visit shares. The UK, Germany, Italy, and France are in the top five, with 7.88%, 7.87%, 6.99%, and 5.93%, respectively.
For 2024, Europe remains the top travel region. In the US alone, France and Spain rank third and fourth as they are favored by 42% and 40% of the respondents. Meanwhile, Italy has 32%, followed by Greece at 21%, Iceland (14%), Ireland (12%), and the UK with 12%.
The digital revolution allowed many businesses and households to adapt to the new normal. It enhanced operational efficiency, leading to business and labor market recovery. Now, many transactions are done online. Even financial transactions can now be done cashless using mobile wallets, debit cards, and credit cards.
For businesses, the accounting department enjoys reviewing financial transactions through electronic invoices from credit and debit cards. Even better, these cashless methods also cover many business travel expenses. Credit cards offer a buffer for elevated prices, allowing them to spend on discretionary items and services, including sports and leisure travel. As the academic year begins, households can also get essential loans, such as a student loan refinance.
Accor SA (AC) and InterContinental Hotels Group (IHG)
Accor SA (AC) and InterContinental Hotels Group (IHG) are our top hotel stock picks for several reasons.
From the first half of 2021 to early 2023, we have seen how these hotels picked themselves up and came back stronger. Although the hotel industry is not yet poised to recover fully this year, its uptrend has been impressive in the past two years. This growth is despite elevated prices, interest rates, and geopolitical tensions affecting the global economy. But what makes AC and IG impressive is their solid fundamentals.
In two years, AC‘s revenue has nearly tripled to €2.4B in 1H23. It is also 38% higher than in the same period in 2022. It was lower than late last year, but we can attribute it to seasonality since travel demand peaks during summer and fall. Even better, margins have remained stable and increased substantially. Aside from higher demand, AC showed enhanced efficiency, allowing it to minimize cost pressures brought upon by inflation. Unsurprisingly, it has generated higher Return on Assets and Return on Equity.
Moreover, the company maintains excess liquidity, crucial for capital-intensive industries like hotels. Its cash levels are adequate to cover the current maturities of borrowings.
Plus, it has enough EBITDA, as shown by the decreasing Net Debt/EBITDA Ratio. Often, 3.5x is the maximum acceptable ratio. But for capital-intensive companies, it can range from 3.5x to 4.5x. Hence, Accor stayed sustainable, given its low ratio in its most recent report.
|Accor SA (AC)
The same goes for IHG, which had a more consistent revenue uptrend. The operating margin was also high at 25%. A substantial portion of revenues remained after deducting the operating costs and expenses.
Given the impressive Net Debt/EBITDA Ratio, it also has better liquidity levels. Actual returns are also high, with its double-digit ROA. At 15.6%, the company earns £15.6 for every £100 spent on acquiring assets.
The only thing that investors must watch out for is its negative ROE. It shows that the company had high spending on liabilities, mainly borrowings. Nonetheless, the low Net Debt/EBITDA Ratio should reassure an investor of its high viability and sustainability.
|InterContinental Hotels Group PLC (IHG)
Their fee-based business model gives them an edge over competitors and macroeconomic headwinds. It has some downsides, like lower revenue collections during macroeconomic shocks, including the pandemic restrictions. Nevertheless, it is more flexible than a leased-based model.
Unlike leased properties, hotels can adjust rates as frequently as possible, depending on the industry trend. So they can maximize revenues and minimize risks.
Stock Price Valuation
The stock price of AC appears very cheap relative to pre-pandemic levels. Since 2020, it has never returned to $40. This could be driven by the fact that hotels have yet to fully recover. Also, it is 12% lower than the 50-day simple moving average.
Meanwhile, its dividend yield remains decent at 2.41%, much better than the S&P 500 (SPX) average of 1.68%. For the PE Ratio, the stock appears quite expensive relative to its earnings in 2022. But if we check the 10-year average, the target price should range from $36 to $40.
Likewise, IHG shows reasonable upside potential, given its current price of $71, 7% lower than the 50-day simple moving average. Dividend yields are also acceptable at 2.00%. For the PE Ratio, the stock price appears more reasonable at 21.05x compared to 22.38x. While the difference stays marginal, the actual EPS uptrend makes the increasing stock price enticing. And if we check the 10-year average relative to the current price, the upside potential points to $76-78.
To Wrap It Up
Hotels are excellent stocks to pour investments into. Risks are still evident, but the industry potential has become more enticing in the five quarters. Now, several growth drivers will help AC and IHG stay afloat and even bounce back.
There may still be macroeconomic shocks like oil concerns that hamper the ability to travel and generate revenues. The important thing is that Europe remains a solid region to support the expansion of hotels amid higher inflation and interest rates.
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