Last year, I bought some shares in FTSE 100 stock InterContinental Hotels (LSE: IHG). So far, they’ve been a great investment (today, I’m sitting on a gain of over 30%).
Looking ahead, I plan to buy more shares in the hotel operator in the near future. Here’s why I’m bullish on the Footsie stock.
A world-class company
In my view, InterContinental Hotels, or IHG for short, is a ‘world-class’ company.
For starters, it owns a whole portfolio of well-known hotel brands. From budget-friendly names such as Holiday Inn to top-of-the-range luxury names including InterContinental, it has many top brands under its umbrella. Well-known brands can be a major competitive advantage.
Next, it’s very profitable, thanks to its asset-light franchise model. Last year, for example, return on capital employed (ROCE) came in at a huge 41% – more than twice the FTSE 100 average (17%). Over the long term, a high ROCE tends to lead to significant company growth and big returns for shareholders.
Speaking of returns for shareholders, this company has an outstanding track record. Over the last 10 years, its share price has risen by about 250%. That translates to an annual return of about 13.4%. Add in dividends (the yield is near 1.8% right now) and the returns have probably been closer to 15% a year. That’s an excellent return over a 10-year period.
As a long-term quality growth investor, one other thing I like about IHG is that it’s exposed to a number of powerful themes. For example, there’s the retirement of the Baby Boomers. Over the next decade, this demographic’s likely to spend a ton of money on travel and hotels. Another theme is rising wealth globally. This should translate to higher levels of spending on travel.
Reasonable valuation
Now, this isn’t a cheap stock. But I wouldn’t expect it to be given its track record and high ROCE.
However, after a recent pullback in the share price, I think the valuation’s starting to look quite reasonable.
Currently, the company trades on a forward-looking P/E ratio of 22.6, falling to 19.9 when we use the earnings forecast for 2025.
At those earnings multiples, I think the company looks quite attractive from an investment perspective.
Consumer risks
As for risks, one is consumer spending. Today, we keep hearing about how the consumer is running out of money.
Personally, I’m not so worried about this risk. That’s because there are two types of consumers right now. There are those who are suffering from higher interest rates and inflation. And then there are those with lots of cash who are suddenly making a ton of extra income, thanks to higher interest rates.
I expect this latter group to continue spending money on hotels in the years ahead.
Of course, one other risk is Airbnb. It’s disrupting the hotel industry. But I’m not particularly concerned about this risk either. That’s because I have also bought Airbnb shares.
So if the tech company ends up stealing market share from hotel operators like IHG, I should still benefit.
