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Patricio Kehoe
Patricio Kehoe
Articles (164) 

Steve Mandel, the Lodging Industry and the Importance of Share Prices

November 19, 2013 | About:

When it comes to investments in the lodging industry, there are many factors to consider. Expansion possibilities, return on investments and franchise or direct ownership, are just some of the elements at hand. So, when looking at firms such as Wyndham Worldwide Corporation (NYSE:WYN) and InterContinental Hotels Group (NYSE:IHG), one must not rush to conclusions. When the playing field is leveled, sometimes secondary factors decide which company is worth investing in, and which is better left aside.

Steve Mandel: In for the Long Haul?

When investment guru Steve Mandel increased his stake in Wyndham to over 5.7 million shares, his intentions became rather clear. Such a large operation represents a 1 million share increase from just some months back, depicting a bullish feeling towards the stock. To some this might come as no surprise; after all, Wyndham is the largest operator of time-shares and hotels in the world – as measured by the number of units in its system.

Not only is this lodging company large in size, it is also rather diversified in comparison to its industry peers, with 50% of revenue stemming from the development, sale and management of time-share properties. Time-share exchange services and vacation rental services make up 31% of the remaining revenue, while 19% is derived from Wyndham’s hotel franchising business. Over the past years, these three different revenue streams have allowed the firm to increase EBITDA margins significantly, without exposing it to unnecessary risks.

Although growth is limited in the time-share business, management fees provide the company with high-margin revenue. Hence, over the next five years, the firm anticipates earnings per share to grow around 17% to 21%. With the economic situation in the U.S. improving, occupancy is bound to increase, playing right into the firm’s business model. Also, acquisitions in early 2013, such as the Oceana Resorts and Kaiser Realty in the U.S., show the company is willing to continue growing. With 940 hotels, and around 112,000 rooms in the pipeline, Wyndham is even expanding into emerging markets in Asia, Latin America and the Middle East.

Yet apart from growth prospects, one of the company’s most interesting features is its focus on rewarding shareholders. Dividend distribution and repurchase are a constant at Wyndham, demonstrating solid cash flow levels. The 1.6 percent annual dividend yield is also attractive for those seeking to have their money in play for a longer period of time. Overall, I agree with Steve Mandel, and feel bullish regarding Wyndham as a long-term investment.

Still Recovering, Albeit Good Prospects

InterContinental is very different from Wyndham, mainly due to its focus on hotel franchising and ownership, and lack of time-shares. With more than 4,500 hotels, distributed throughout 100 countries, InterContinental is also considered a truly global firm. The company boasts a portfolio which includes, among others, the highly famous Holiday Inn brand, and two other upscale brands: InterContinental and Crowne Plaza.

InterContinental is set to continue deriving high returns on investments from its franchised hotels, which make up 99% of its assets. Long contracts, minimal expenditures, and margins above the 80% mark, result in a highly lucrative business model. And there is no good reason to believe the company will not stay on this profitable path. The network effect obtained from having the largest amount of hotels in the world, and the firm’s strong brand recognition, has enabled Intercontinental to develop a narrow economic moat.

Market expansion is also bound to increase revenue for the company, especially in China. The firm, who has been active in China since 1984, is very well positioned to take advantage of growth opportunities in this emerging market. InterContinental already has 50,000 rooms in the pipeline for this highly underpenetrated market, which will represent an annual unit growth rate of around 15% in coming years.

Despite having a great future outlook, some analysts have warned investors to stay away from InterContinental. And investment gurus of the likes of Steven Cohen and Jim Simons seem to be keener on extracting short-term profits, than relying on a long term investment. Entry at this point simply might not make much sense. The recovery in the lodging industry has already been priced into the company's share price, which has increased by more than 300% since early 2009. Hence, while the firm seems to have a great outlook, it has not yet reached its 2007 share price value, making me feel less optimistic in terms of a long-term investment.

Sometimes Share Prices Are the Key

Although some might be impressed by InterContinental’s brands and expansion projects, share prices tell a different story. Where this hotel operator is still struggling to achieve pre-crisis share value, Wyndham has already doubled its 2007 share price. The diversified nature of Wyndham’s business model, along with a history of rewarding shareholders, should make investors confident when looking for a long-term investment. Like Steve Mandel, I feel bullish regarding Wyndham and its future growth prospects.

Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

About the author:

Patricio Kehoe
A fundamental analyst at Lone Tree Analytics

Rating: 4.4/5 (5 votes)


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