As reflections of the broader hospitality sector's heartbeat, hotel stocks offer a fascinating tapestry of numbers and trends that catch the eye of discerning investors. Dominating this sphere are C-corporation hotels, the titans that offer more than just luxurious accommodations and fine dining. They are maestros in hotel management, pioneering branding strategies and dynamic marketing, orchestrating an ensemble of services that set the stage for remarkable returns on investment.
One reliable metric that captures the essence of their robust performance is the S&P 1500 Hotels, Resorts and Cruise Lines Sub-Industry Index. This index has showcased a strong total return of 41% this year, a testament to the resilience and profitability of the top hotel stocks. Such buoyancy in the hospitality sector is laudable in a world rife with economic uncertainties and unexpected events.
For context, total return is a comprehensive measure, accounting for both capital appreciation and dividends, to gauge the full spectrum of an investment's profitability. When you compare this with broader market benchmarks like the Russell 1000 Index, which marked a rise of 17% during the same period, the hotel industry's propensity for growth and innovation becomes even more apparent.
Criteria for evaluating hotel stocks
I will dig deeper into the most promising hotel stocks in this analysis using the GuruFocus All-In-One Screener to single out gems that outperform their peers in key metrics. I will look at the three-year free cash flow growth rate, a crucial indicator of a company's ability to generate surplus cash, crucial for both reinvestment and shareholder returns. Cash flow will serve as my underlying litmus test because if a company rapidly depletes its cash reserves, sustaining dividends becomes a tall order.
Additionally, I will delve into the shareholder yield, a comprehensive metric that includes dividends, share repurchases and debt reduction, to measure how well a company returns value to its shareholders. Finally, I will scrutinize the payout ratio as a high ratio compared to peers often suggests unsustainable dividends.
So fasten your seatbelts as we embark on a journey through the dynamic corridors of the hotel industry, unearthing stocks that promise a stay and a rewarding investment experience.
Analysis of Marriott International
Marriott International Inc. (MAR, Financial) has long been a shining star in the travel and leisure industry, boasting a year-to-date return of 37%. The hospitality giant topped estimates and saw international demand skyrocket, contributing to a revenue of $1.62 billion in the second quarter— an impressive 14% surge year over year. Marriott is not just tiptoeing its way through the year; it is taking confident strides.
Its latest earnings report revealed a net income of $726 million, up 7% compared to last year, and an operating income of $1.13 billion, marking a 19% increase. Amid these figures, what stands out is the diluted earnings per share, which not only rose by 16% but also beat market expectations by nearly $4.
Besides these stellar financials, Marriott's shareholder yield and dividend payout ratio outclass most of its competitors in the sector. Specifically, it ranks better than 73% of companies regarding shareholder yield, and its dividend payout ratio surpasses 80%. The company has also showcased a promising three-year free cash flow growth rate per share of 27%, outperforming nearly 70% of companies in the industry.
It is worth noting that while Bernstein downgraded Marriott, the company's recent partnership with MGM Resorts (MGM, Financial) for Las Vegas Strip booking and elevated international demand put it back in the spotlight. Thus, Marriott continues to exemplify resilience and growth in a competitive hotel landscape, making it a compelling narrative in hotel stocks.
Analysis of Choice Hotels International
Choice Hotels International Inc. (CHH, Financial) is an intriguing option for investors seeking opportunities among hotel stocks. The company has delivered a 15% return for the year to date, comfortably outperforming the broader hospitality market. The earnings report for the second quarter reveals top-line growth of 19% year over year, with revenue hitting $213.1 million.
While this uptick is certainly applaudable, there are some nuances. The company saw a 20% dip in net income and operating income also retreated by 13%. Despite these drawbacks, the company's diluted earnings per share surpassed estimates by nearly 4%, lending a mixed but overall positive hue to the company's financial portrait.
Crucially, Choice Hotels shows resilience in shareholder yield and dividend payout ratio, both key indicators for long-term sustainability in the volatile travel and leisure sector. The company's shareholder yield ranks better than 53% of companies in the industry, while its dividend payout ratio of 0.19 places it ahead of nearly 79% of competitors. Its three-year free cash flow growth rate per share also stands at a promising 10%, signaling it has a knack for efficient capital allocation.
As Marriott is busy with its Las Vegas Strip booking deal in partnership with MGM Resorts, Choice Hotels appears to be quietly but steadily carving out its space in the hospitality market. A diversified portfolio and a balanced financial sheet make Choice Hotels an option worth considering for those looking to add some hospitable flair to their portfolios.
