Markets can have their pick-and-choose cycles for their favored sectors in the economy. The hotel and accommodation spaces are among the few sectors pushing the U.S. economy forward, despite FED actions to slow down business activity and rampant inflation rates. There are readings in economic data that suggest a few months of growth and other subsequent markers that also point to subsequent growth in the coming months ahead.
Investors can gain exposure in a few select stocks, stacking the bulk of the odds in favor of a coming bull run.
The United States ISM non-manufacturing PMI reports, which measure the monthly increase/decrease rates in underlying business activity, have been flashing green lights in the lodging industry for the past seven months.
With readings of expanding business activity, accelerating employment, and rising production, markets have been allocating resources to the sector, especially those stocks perceived to be the winners amongst the peer group.
It will become evident to investors why companies like Hyatt Hotels (NYSE: H), H World Group (NASDAQ: HTHT), and Hilton Worldwide (NYSE: HLT) are the chosen winners in an accelerating sector, calling for additional upside potential to be had.
Performance Hints
When looking at the recent stock price performance for all three of these names, a reasonable sentiment perspective can be gained and a hint as to where the price may be headed next. Hyatt has been the winner regarding raw price performance, as the stock posted a twelve-month performance of 61.9%.
This performance will take the podium compared to Hilton's 35.4% and H World Group's 14.7% during the same period. Despite massive performance differences, these stocks all share a common thread, which is the reason behind the beliefs of future rallies.
Two of the three stocks have been following a similar pattern, which may help push the more minor constituents of the industry forward as well.
Besides H World Group, whose stock price has been under pressure from geopolitical headwinds in China (where the firm operates), Hyatt and Hilton have followed almost lock-step price movements.
Now that these two American-based firms are nearing their previous all-time high prices, there will be additional pressure on management teams to deliver adequate results to justify these high valuations and even provide some fuel for a breakout to new highs.
Even though the yearly performances vary, alongside the forming chart patterns, there is one common thread that these stocks share as the 'favorites' in the sector. Investors can spread the forward price-to-earnings ratios in the sector, which differ from the conventional P/E in that this ratio takes the next twelve months' earnings expectations into account rather than the past twelve months.
Hyatt carries the highest multiple in the sector, at a staggering 32.4x. H World Group and Hilton are trading relatively lower, at 24.8x and 22.8x multiples, respectively. Nonetheless, these three valuations are head and shoulders above any other name in the sector. Why are markets rewarding these stocks with higher valuations?
Justifying Breakouts
Some may argue that these stocks are only the space's most 'expensive' alternatives. However, there must be a viable reason why markets are willing to pay a premium for these stocks compared to other 'cheaper' names. Analyst earnings estimates can be the key to tying these valuation premiums; Hyatt analysts are pointing to 2024 earnings per share of $3.48, a 33.94% advance from today's levels.
H World Group estimates will point to an estimated $1.72 EPS, reflecting an annual growth rate of 26%.
Lastly, Hilton estimates suggest a $6.63 figure for 2024 EPS, bringing in the lowest growth rate of 13.35%. These figures explain why markets are willing to pay above industry-average valuations for these names, as the consensus agrees on better-than-average growth and money likes growth.
Now that investors understand what is driving these preferences, it would be beneficial to set a reasonable timeframe for expected moves. Earnings season is starting to kick off, with July and August being the two months when these hotel stocks report their results.
Consequently, investors can look to the earnings results as a catalyst to make the stock prices move in the market's perceived direction, which happens to be up at the moment. However, investors should hope for some expectations to be beaten; otherwise, another sort of bullish announcement from management to push the stock even higher.
