Smooth Sailing for Hotel and Cruise Stocks

03/29/2007 12:00 am EST


Sam Stovall

Chief Investment Strategist, CFRA Research

Sam Stovall, Standard & Poor's chief investment strategist, says the hotel, resort, and cruise ship industry sector is showing fundamental and technical strength and he recommends some stocks to buy in the sector.

In the past 13 weeks, three Standard & Poor's 1500 subindustry indexes that have been given positive fundamental outlooks by S&P equity analysts saw their relative strength rankings rise, putting their trailing-12-month price performances in the top 30% of all subindustries in this composite benchmark (which consists of the S&P 500, MidCap 400, and SmallCap 600 Indexes).

One of those groups is the S&P Hotels, Resorts & Cruise Lines. In the year to date, through Mar. 23, this group rose 2.1%, vs. a 1.8% rise for the S&P 1500. In 2006, the subindustry index advanced 13.4%, slightly above the S&P 1500's 13.3% gain.

Is the fundamental picture favorable for this group? Yes, according to S&P analyst Thomas Graves, CFA, who covers this group and has a positive fundamental outlook for the US hotel industry but a more cautious view of demand for cruise ship travel. Graves sees hotel industry conditions being helped by improved demand in both leisure and business travel.

In the year ahead, assuming there are no additional terrorist attacks or war-related activity that make consumers significantly more fearful of travel for a substantial period, S&P expects demand for US hotel rooms to increase further. Also, S&P expects that the pace of supply growth will increase in 2007, leading to a modest decline in average room occupancy. However, Graves anticipates that increased demand will lead to higher room prices, and that this will help industry profits to increase.

Longer term, however, Graves thinks a hike in the federal minimum wage could put some pressure on the US hotel industry's labor costs.

The US lodging industry has approximately 4.5 million rooms located at roughly 50,000 properties. S&P notes that investors should keep in mind that the operations of some hotel-related companies include one or more other businesses, such as gaming or time-share facilities.

For the cruise industry, S&P generally sees favorable US demographics (i.e. an aging population) that should help long-term interest in cruise vacations. Graves notes that starting in 2008 or 2009, cruise passengers seeking to enter or re-enter the US from the Caribbean, Mexico, and Bermuda will be required to provide documentation such as a passport. After taking effect, the analyst thinks this could have at least a modest short-term negative effect on cruise ship travel if some potential travelers lack appropriate documents.

The group's longer-term momentum leadership is rising, and S&P believes the fundamentals are intact, implying that these stocks have further to rise. Among S&P's top picks in the group are Choice Hotels (CHH), InterContinental Hotels (IHG) and Wyndham Worldwide (WYN), each ranked 4 Stars (Buy).

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