Should I Buy InterContinental Hotels Group plc?

I’m out shopping for shares again. Should I add InterContinental Hotels Group (LSE: IHG) (NYSE: IHG) to my trolley?

Inter action

InterContinental Hotels Group is one of the surprise beneficiaries of the recession. You might think a global hotel chain would have been hit by the slump in business travel, but the lack of business finance made it tricky for smaller rivals to borrow funds to compete. That made it a tempting defensive investment, with the prospect of growth once the global economy clicked back into gear. My biggest concern is that after rising 250% in five years, the global hotel chain now trades at an expensive 20 times earnings. Should I buy it anyway?

The share price is down 8% in the last three months, while the FTSE 100 has been flat. That surprises me, given the group’s good half-yearly results, with a 7% rise in revenue to $936m and a 20% rise in operating profits to $338m. First-half revenue per available room (RevPAR) rose a healthy 4.7% in the US, thanks to growing business travel, and 6.2% in Asia, Middle East and Africa. But it was (predictably) flat in Europe and (surprisingly) in China.

Management has been generous to investors, handing out a special dividend worth $350m in October, and hiking the interim dividend 10% to 23 cents a share. The stock now yields 3.5%, bang in line with the FTSE 100. Management also has an ongoing $500m share buyback programme, although all this largesse has helped push up net debt from $564m to $861m.

Continental drift

I am worried by its stuttering China growth, where first half RevPAR grew just 0.1%, although that did rise to 1.9% in Q2. This morning’s news from China showing Q3 GDP rising in line with forecasts to 7.8% may soothe fears over a hard landing, but China is no longer a straight-up bet. Happily, InterContinental’s broad geographical diversification gives it access to faster-growing frontier markets. The group boasts more than 4,500 hotels in over 100 companies, but owns hardly any of them, having offloaded the physical asset and signed long-term contracts to manage the business. This attractive model continues, with the recent disposal of InterContinental London Park Lane for $368m alongside a 60-year contract to manage the joint.

Forecast EPS growth looks strong this year at 11% and solid in 2014 at 6%. Citigroup has it as a ‘buy’, although it has just dropped its target price from 2200p to 2050p. Despite its solid performance and prospects, I can’t bring myself to meet that pricey valuation.

InterContinental isn't quite good enough to feature in our special report 5 Shares To Retire On. This free report by Motley Fool share analysts namesfive FTSE 100 favourites to secure your retirement. To find out more,download this report now. It won’t cost you a penny, so click here.

Harvey Jones doesn't own any shares mentioned in this article