What are we looking for?
According to the 2014 edition of “Trends in the Hotel Industry,” hotel profits for 2014 are on pace to exceed pre-recession levels. In addition, the World Travel & Tourism Council is predicting a 5 per cent annualized growth rate over the next decade. Since we are approaching the summer holiday season, my colleague Rob Belanger and I decided to take a closer look at the hotel sector.
We started with hotels around the world, excluding casinos, and sorted them by market capitalization from the largest to the smallest.
Enterprise value divided by earnings before interest, taxes, depreciation and amortization (EV/EBITDA) is one of the most commonly used valuation metrics. We are looking for a low number.
Only companies that had a positive sales growth over the past 12 months were included.
Operating margin is a measurement of what proportion of a company’s revenue is left over after paying for variable costs of production such as wages, promotion, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt. Our screen only shows companies that had an operating margin greater than 5 per cent.
We also only included hotels that had an average occupancy rate above 50 per cent over the past 12 months.
RevPAR (revenue per available room) is a standard hotel performance evaluation ratio calculated by multiplying the average daily room rate by the occupancy rate. We are looking for a high number.
What did we find?
Listed on Nasdaq under the symbol HTHT, China Lodging Group operates hotels in China. The company led the pack in EV/EBITDA and occupancy rate.
London-based Millennium and Copthorne Hotels owns more than 100 establishments around the world, including in Singapore, Dubai, Paris and New York. The company had sales growth in the past 12 months of 35 per cent.
Extended Stay America Inc. has hotels in most U.S. states, and in Ottawa and Toronto, and had the best operating margin.
Orient-Express Hotels Ltd. is a luxury hotel company and adventure travel operator. It has an impressive RevPAR of $306, and 922,798 rooms.
Before you crawl into bed with any of these companies, we advise you conduct further research or contact an investment professional.