Cozy Pullback Makes Home Inns a Buy

03/13/2012 2:07 pm EST


Jim Jubak

Founder and Editor,

Markets have beaten up the stock after an earnings miss, but as MoneyShow’s Jim Jubak writes, the growth story is too strong to keep shares down for long.

In my March 6 post, I suggested waiting until Home Inns and Hotels Management (HMIN) reported fourth-quarter earnings on March 8, because the company might well disappoint.

Sure enough, it did. And the stock is trading today, as of 1:15 p.m. New York time, 14.2% below its March 5 price. (I’m adding the stock to my Jubak’s Picks portfolio today.)

What was the Chinese lodging company’s big sin? Not revenue. Revenue for the quarter came in at $208 million, above the consensus estimate of $191 million, and up 64% from the fourth quarter of 2010.

The sin lay in earnings. At 12 cents a share, earnings badly missed Wall Street estimates of 28 cents.

A big part of the problem was a $2.8 million loss from Motel 168, a chain recently purchased by Home Inns and Hotels and that hasn’t yet been fully integrated into the company. A loss of $2.8 million might not seem like much, but total income for the quarter was just $5.2 million.

The other part is difficult comparisons with 2010, when the Shanghai Expo added to travel and occupancy rates throughout China.

You can see the influence of both the acquisition and the Expo in the company’s occupancy numbers. In the fourth quarter, the occupancy rate was 84.2% including the Motel 168 operations, but 88.4% without those properties.

However, in the fourth quarter of 2010, when the company was still feeling the effects of traffic to the Shanghai Expo, occupancy hit 90.4%. In the third quarter, the Expo effect was even greater, and occupancy rates hit 94.1%.

RevPar—revenue per available room—at properties open for 18 months or more (and excluding Motel 168) climbed slightly to 162.3 yuan in the fourth quarter of 2011 ($25.65), from 162 yuan in the fourth quarter of 2011.

There’s no doubt that China’s growth rate has slowed in 2012 from 2011, and that has hurt the short-term results for Home Inns and Hotels. But the company continues to build out its brands, adding 306 new inns and hotels in 2011, launching and then expanding its mid-price Yitel brand, and adding ten new properties to the Motel 168 acquisition.

The company finished 2011 with 1,426 hotels—split about evenly between company-owned and franchised—in 212 cities.

In the long term, travel and lodging is projected to be one of the fastest growing consumer sectors in China as incomes continue to rise. I expect these shares to recover to their pre-earnings level—say, $33 a share—by mid-2012.

I’m adding Home Inns and Hotels Management to my Jubak’s Picks portfolio with a target price of $38 by December 2012.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here.

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