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Summary: For 1Q08 earnings season, we are expecting results to be mixed
among the companies, although our estimates already factor in weakness in
trends. We continue to focus on companies' outlooks, which we believe reflect
a slowdown, but in some cases may not be low enough. We also note that
1Q08 results should highlight the significant differences among the companies'
segments, geographies and business models.
• According to Smith Travel Research data, the luxury and boutique hotel
segments have outperformed the general U.S. RevPAR growth average of
1.6%. In addition, urban markets have outperformed the U.S. average as
well, with average RevPAR growth of the top 25 cities of 2.5%.
• Some companies in our group cut guidance at year-end more aggressively
than others, which suggests further reductions could be in the offing. We
also note that this quarterly reporting season could demonstrate the key
differences among our companies in terms of business model, geographic
and pricing segment exposures.
• We draw investors' focus to two names. HOT is exposed to stronger
segments and geographic regions than its competitors, which could result
in a stronger performance/outlook. Thus we take a positive stance on HOT
into the quarter. Anecdotal evidence suggests rising attrition rates in the
convention segment. Coupled with weakening transient trends and only a
modest reduction in guidance so far, this suggests further outlook revisions
could be forthcoming for GET.
Will They See “It” Yet? Awaiting Signs of a
Decline in the Lodging Sector
1Q08 Preview of Lodging Stocks
With 1Q08 reporting taking place soon after the 4Q07 earnings season, we believe deviation
from guidance or our estimates could be limited this quarter. The question that remains in our
minds, however, is whether guidance (which was significantly cut by most companies last
quarter) is low enough. For some it might be, while others not. The winners and losers in the
quarter should support an important aspect of our thesis, which is that the Street appears
stuck at a macro level on the hotels stocks. Quarterly results should demonstrate that
geography, pricing segments and business models do matter. Nonetheless, hotel companies
are a lagging indicator and have not communicated signs of weakness as of yet, although they
expect it. Ultimately, we expect this quarter’s results to provide some important insight into
where business is headed for the remainder of the year.
Which Cities And Segments Are Winners And Losers This Quarter?
Top Segments. Total RevPAR growth was up 1.6% on average, according to Smith Travel
Research data. Part of the reason for the slowed growth this quarter was due to timing of
holidays, which caused several weeks of negative RevPAR growth. The luxury segment
outperformed the U.S. average, with RevPAR growth of 3.1% for the quarter and boutique
hotels were the highest outperformer, with RevPAR up 5.6%. The remaining segments
underperformed the U.S. average. The strength in the luxury segment should be positive
for Starwood, which has exposure through its St. Regis and W brands. While the W
brand is still fairly small, HOT actually owns seven W hotels in the United States, with the
performance of the brand moving the needle for HOT, as a result. The W brand is also
positively impacted by the strength of the boutique segment, which reported the highest
growth. Additionally, these results are also positive for MHGC, which is a pure boutique
play, and which we expect to have a strong quarter from a fundamental perspective.
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