Having more than three-bagged in the last 10 years, FTSE 100 constituent and Holiday Inn owner InterContinental Hotels Group (LSE: IHG) has been a long-term winner for investors. Even those late to the party will have enjoyed decent gains over the last year or so as (post EU referendum) more and more market participants became attached to the Uxbridge-based giant’s dollar earnings – and the fact that US sales make up more than half of all turnover.
Today’s update is unlikely to ruffle many feathers. Group revenue per available room (RevPAR) – a performance metric widely used in the hotel industry – rose 2.3% over the reporting period. Europe and Greater China remained the best-performing markets for the company in 2017 with RevPAR growth of 7.1% and 7.8%, respectively, in the third quarter. The former was helped by double-digit increases in Belgium and Turkey as trading in both countries recovered strongly from terrorist attacks. Elsewhere, performance in the Americas was mixed with the impact of Hurricanes Harvey and Irma in the US and the recent earthquake in Mexico taking the shine off buoyant trading in Canada and Latin America.
Looking to the future, CEO Keith Barr reflected that the £7.8bn cap had made “an excellent start” on its plans to accelerate the growth of its brands. In addition to opening 11,000 rooms over the period, the company also launched avid hotels (designed to target a “$20bn underserved segment in the US“) and secured signings in Shanghai, Sanya Bay and Auckland. It also has 235,000 rooms in its pipeline, with 45% of these currently under construction.
So, what’s the problem, you ask? Simply that, at 23 times forecast earnings, a lot of growth already appears priced in to the shares, which may explain the market’s rather mooted reaction to this morning’s update. Considering the hugely competitive market in which it operates, not to mention the popularity of alternative sources of accommodation such as Airbnb, I’m left wondering if better opportunities might exist elsewhere.
Growth… at a better price
Those concerned by InterContinental’s valuation may wish to consider Premier Inn owner Whitbread (LSE: WTB) instead. While still to test the heights it achieved back in 2015, the Dunstable-based company’s stock trades at a considerable discount to its peer at just under 16 times forecast earnings.
Like InterContinental, Whitbread is keen to continue pushing its brands overseas. Only this week, the company announced that it will acquire the remaining 49% of its South China Costa joint venture with Yueda for £35m. This will allow the former full ownership of 252 stores and access to a “highly attractive” and “fast-growing” market, according to CEO Alison Brittain.
By not relying solely on its hotel business, it may be suggested that Whitbread is also a safer play than Intercontinental. Other reasons for favouring the hospitality firm’s share include a slightly higher (2.5%) forecast yield and significantly less debt on its balance sheet. True, the possibility of a slowdown in discretionary spending by consumers as inflation begins to bite isn’t ideal, but the notion that we’re all about to dramatically reduce our caffeine intake feels over-the-top.
While it might be best to wait for next Tuesday’s interim numbers for signs that the company has managed to reverse the dip in sales seen earlier in the year, I think Whitbread offers far better value at the current time.
