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I think this FTSE 100 stock is due a major comeback. Here’s what I’d do now

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The travel and leisure sectors have been hit by the pandemic, but some FTSE 100 stocks have better recovery potential than others. Like the one I’m looking at here.

Air carriers remain plunged in misery, with EasyJet trading 10% lower than six months ago, and British Airways-owner International Consolidated Airlines Group down 30%. Measured over one year, they are down 57% and 69% respectively.

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Until we can start flying again, without fear of sudden lockdowns, these FTSE 100 stocks will struggle.

There are more signs of life in the hotels sector. Foreign and business travel may have collapsed, but the staycation has partly compensated. The InterContinental Hotels Group (LSE: IHG) share price inevitably crashed in March as the world went into lockdown, but the FTSE 100 stock has staged a plucky recovery since. In fact, it is up almost 25% in the last six months. It now trades just 6% lower than this time last year, when we’d never heard of coronavirus.

This FTSE 100 stock can recover

The Holiday Inn and Crown Plaza owner has fared much better than Premier Inn owner Whitbread. Its share price is still down 33% compared to a year ago. A few days ago I called Whitbread a tempting-but-risky buy, trading at just 11.4 earnings. So what about IHG?

The all-important measure of success in the hotels trade, revenue per available room (RevPAR), plunged catastrophically in the lockdown. However, by August IHG was reporting signs of improvement, helped by the fact it has hotel operations in fast-recovering China.

Today, IHG reported improved third-quarter trading, although progress continues to vary by region. RevPAR declined 53%, but that was an improvement on a decline of 75% in the second quarter. Occupancy was also heading in the right direction at 44%, up from 25% in Q2.

CEO Keith Barr said domestic mainstream travel remains resilient, as the rise of the staycation helped offset the fall in business travel. IHG still has a long way to go, with 199 hotels still closed at the end of September, although this is only 3% of its estate.

The balance sheet is more solid than many FTSE 100 stocks, with positive cash flow in Q3 boosting total available liquidity to $2.1bn. By issuing new funds and partially repaying 2022 bonds in early October, it increased liquidity further to $2.9bn.

The IHG share price is hard to value

IHG directly owns only a small number of its hotels, with most operating as franchises. That helps ease pressure on the bottom line. It has also cut back on costs, with gross capital expenditure expected to be around $150m in 2020, a saving of $100m on last year.

My worry is that the next lockdown is going to hurt, with so many beds empty today. That isn’t stopping IHG from opening 11,000 rooms in the quarter. Not every FTSE 100 stock is so optimistic.

IHG suspended its dividend earlier this year citing “limited visibility”. In my view, visibility hasn’t improved much. Its share price is almost impossible to value. Its P/E ratio is set to top 138 this year, as earnings per share fall a forecast 87%. It is then expected to retreat to 31.1 times next year, with earnings forecast to rise a bumper 341%.

That all rests on Covid-19, of course. This FTSE 100 stock looks nicely placed to survive the pandemic, but the pace of the recovery could be slow.

I'd check out this stock first.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended InterContinental Hotels Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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