When picking stocks, it’s hard to know which businesses will still be successful in 50 years. One of my long-term picks would be hotels. After all, providing hospitality and accommodation in return for payment has been a profitable business throughout recorded history.
I think major hotel brands are likely to be good long-term investments… if the price is right. Today, I’m going to look at three London-listed hotel stocks I’d be happy to own.
Biggest and best?
I’ll start with FTSE 100 firm Intercontinental Hotels Group (LSE: IHG). This £9.4bn group owns 17 hotel brands including Holiday Inn, Crowne Plaza, InterContinental and Six Senses. What it doesn’t own is hotels — at least, not many.
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Over the years, IHG has gradually shifted to owning brands. Most of the hotels are franchised — the group controls 837,000 rooms in 5,603 properties, but owns just 23 hotels.
This model means spending requirements are fairly low, but profit margins are high. Cash generation is good and, although the dividend yield is just 2%, InterContinental has a record of making one-off extra cash payments to shareholders whenever possible.
The shares are close to all-time highs and trade on about 20 times forecast earnings. I wouldn’t be afraid to buy at this level but, personally, I’d aim to wait for the next market dip to secure a better entry price.
Closer to home
One option for investors who’d like more direct exposure to the UK market is Premier Inn-owner Whitbread (LSE: WTB).
At the end of February, there were 804 Premier Inns in the UK, with 76,171 rooms. The business struggled to grow last year and revenue per available room (an industry standard measure) fell by 1.7% to £48.99.
However, one attraction is that the brand is extremely strong, with 97% of bookings made directly. This should help build customer loyalty, as it suggests many travellers simply look for the nearest Premier Inn to their destination, rather than searching for other hotels.
The company plans to continue expanding in the UK and has a pipeline of nearly 13,000 new rooms. Using cash from the Costa sale, the company is now planning a significant rollout in Germany, where it believes the budget market is underserved.
Whitbread shares have pulled back from the £51 high seen earlier this year. My feeling is the shares could continue to fall back towards the £40 level, where I’d be keen to buy.
Primed for growth?
If you’re looking for a smaller business with the potential to deliver rapid growth, one company I’d consider is budget brand easyHotel (LSE: EZH).
Revenue has tripled from £3.5m to £11.3m over the last five years. Results published today suggest this momentum is continuing. Revenue for the six months to 31 March rose by 52.6% to £7.26m, compared to the same period last year.
The profitability of this business has been fairly weak so far, in my view. However, I’m hopeful this will improve as the company continues to expand and shifts its focus towards franchising.
easyHotel shares have fallen by nearly 40% over the last year and now trade broadly in line with their book value of 81p. The shares look expensive relative to earnings. But if the group’s rollout continues at this pace, I believe profits could rise quickly. I see this as a buy for long-term investors.
