“In the near term, these companies should benefit from improving demand,” analyst Anthony Powell says.
Catherine Ivill/Getty ImagesHotel stocks have been clobbered by the coronavirus, as both business and leisure travel cratered amid the lockdowns. Barclays, though, is arguing that the big lodging chains have gotten too cheap.
Analyst Anthony Powell upgraded Marriott International (ticker: MAR) and Hilton Worldwide Holdings (HLT) to Overweight from Equal Weight on Monday, and raised his price target to $105 from $92 for Marriott and to $90 from $82 for Hilton. “In the near term, these companies should benefit from improving demand trends for U.S. select-service hotels and resort destinations; next year, the companies should more fully price in a return of corporate and group travel.”
Powell acknowledges that Covid-19 remains a major hurdle, not only for hotels but for the travel industry. But he says the worst of the pain, in terms of growth in revenue per available room (RevPAR), is in the rearview mirror, as demand trends have started to improve. Indeed, May RevPAR came in 9 percentage points ahead of his expectations, and June looks to be better than expected as well. Business travel could resume as the economy reopens, and stimulus checks could also fund some vacations. All together, better occupancy should provide some relief for companies’ cash burn, and means that profits may not be as hard hit as originally feared.
Moreover, he argues, history tells investors that now could be a good time to buy. “The best time to invest in lodging stocks is usually ahead of the start of the cycle and in the early innings of the cycle. A year from now, we expect the stocks to be higher as investors start to look forward to the return of corporate and group travel, improved unit growth and an increase in hotel acquisition activity.” He expects the stocks’ valuations will expand later this year and in early 2021, as the market anticipates a recovery.
Thus, Powell believes that any near-term selloffs on concerns about Covid are buying opportunities. In addition, to Marriott and Hilton, he also lifted his rating on small DiamondRock Hospitality (DRH) to Overweight from Equal Weight, raising his price target by $1 to $8, given its exposure to resorts within driving distance for many Americans.
While coronavirus-related headwinds are problems for the travel industry as a whole, it is hard to think of two companies in better position than Marriott and Hilton. The two enjoy a virtual global duopoly on hotels and, while there have been new incursions from the likes of Airbnb, these companies have been expanding in the home-rental market as well, and flexing their muscles against online travel agencies. (Marriott shares had gained nearly 12% after Barron’s recommended them last year, before the pandemic-fears pummeled the industry.)
Barron’s has argued that other hotels could also emerge stronger and better.
Write to Teresa Rivas at teresa.rivas@barrons.com
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Buy Marriott and Hilton Stocks, Analyst Says, Because They Are Cheap Enough - Barron's
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