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Three Hotels Cashing In On Vacation Spending

Posted: Jul 16, 2008 10:50 AM by Will Ashworth

Tickers in this Article: WYN, CAR, BEE, IHG, L, MAR, SNSTA

It's summer, and summer means travel. Americans, despite high gas prices, will still hit the roads and airways in search of the perfect vacation. Perhaps they won't go as far, but they'll still go. It's in our nature. The question for investors is whether any companies will be able to take advantage of this desire to move about the country. Unless you're into camping, you'll probably need some kind of accommodation where you're going. These three companies could do the trick.

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Wyndham Worldwide (NYSE:WYN)
A former subsidiary of Cendant Corp., now known as Avis Budget Group (NYSE:CAR), Wyndham has three corporate divisions that include hotel lodging, vacation exchange and rentals and the sale of vacation ownership interests. Business is just fine.

Revenue in the first quarter was $1.0 billion with good numbers from all three segments. Its vacation ownership interest sales were up 7%. System-wide revenue per available room (RevPAR) was up 2.7% year-over-year, and comparable RevPAR up 2.2%. Vacation exchange members reached 3.6 million, up 5% for the quarter and vacation rental prices increased by 18%, or 9% excluding currency translation. Wyndham expects full-year revenue of between $4.8-4.9 billion with EBITDA of $920-945 million. Vacation ownership sales represent 38% of revenue, service fees and memberships 37%, franchise fees 12% and consumer finance 8%. This balance should provide some protection against a deteriorating economy. A further cushion comes from international business, which is 22% of total revenue, up from 15% in 2001. Given the stock is down 60% in the last year and price-to-sales, price-to-book and the PEG are all under 0.80, it's no wonder some analysts believe the stock is undervalued. (Read more on valuation through ratios in Analyze Investments Quickly With Ratios.)

Strategic Hotels & Resort (NYSE:BEE)
This Chicago-based hotel REIT went public in June 2004. It owns 20 high-end properties with 9,042 rooms in North America and Europe. Hotel chains it works with include Intercontinental Hotels Group (NYSE:IHG), Loews (NYSE:L), Marriott International (NYSE:MAR), Four Seasons and Ritz Carlton. These are all wonderful hotel operators. Eighty-two percent of its rooms are in the U.S., while 5% are in Mexico, and 13% in Europe.

In the last three years, Strategic Hotels has added 2,467 rooms. Its international business is growing; in 2005, Europe accounted for barely $17 million in revenue. In 2007, this number grew to $116 million. Total revenue has also grown to $1.01 billion at the end of 2007 from $461.51 million in 2003. With operating income rising from $25.41 million to $130.41 million during the same period, that's compound annual growth rates of 50.5% and 21.6% respectively. Management's EBITDA guidance is $264-275 million for fiscal 2009, up from $238 million last year. (To learn more on this calculation, read A Clear Look At EBITDA.)

The luxury and upper upscale segments have done fabulously the past few years. Will Strategic Hotels keep up while hotel prices are more of an issue? Time will tell.

Sonesta International Hotels (Nasdaq:SNSTA)
Are you looking for something more family oriented? Sonesta has been in the hotel business for over 60 years, getting its start in the 1940s when A.M. Sonnabend bought a controlling interest in Childs Restaurant Group, merging his hotels into the restaurants and then renaming it the Hotel Corporation of America (HCA). Today Sonesta is operated and run by three generations of Sonnabends, and the company manages or owns 27 hotels and five cruise ships, with projects under development in Orlando, Mexico and Costa Rica. In 1970, HCA was renamed "Sonesta" in honor of A.M. & Esther Sonnabend's dairy farm.

Sonesta's business seems to be holding steady. In the first quarter, revenue was up 13% to $22.92 million from $20.28 million, and operating income jumped to $80,000, up from a loss of $737,000. A key asset in the company's future is its 50% partnership interest in the former Sonesta Key Biscayne in Florida. In 2005, it transferred ownership of the land and assets of the hotel to a development partnership. It then leased the hotel for $1 per year until the end of August 2006, when the hotel closed. Its share is on the books for $33.67 million. It has approval to build a 165 unit residential project. Unfortunately, given the Florida real estate markets, it might take awhile. This one's your micro cap gamble. (To learn more, read How To Evaluate A Micro-Cap Company.)

Bottom Line
Each of these stocks is down more than 40% in the last year. Business is not that bad. I believe that the future, while murky, is good for all three. If you have some play money you might want to consider one of them for your portfolio.

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

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