Can This Hotel Stock Keep Its Momentum Going?

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Last year was a turning point for the hotel industry as things finally returned to normal, that is pre-COVID levels, after a three-year drought. InterContinental Hotels Group (NYSE:IHG) is testament to that, as it issued its 2023 review that showed strong growth across its portfolio of hotels.

InterContinental Hotels Group, commonly referred to as IHG, saw its share price rise 60% in 2023 and this year, it is already up about 17% to over $107 per share. That is not only a 52-week high for the stock, but an all-time high. Investors may be wondering if it is still a buy after this recent surge. Let’s take a closer look.

A strong 2023

IHG’s year-end review, released Tuesday, included some impressive results, as revenue spiked 19% for the year to $4.6 billion and operating profit rose 70% to $1.1 billion. It was the first time that the company posted annual operating profit over $1 billion within its reportable segments.

In addition, IHG also performed well in the key metrics that the industry watches closely – revenue per available room, or RevPAR, average daily rate, and occupancy rates. RevPAR was up 16% in 2023, and it was 11% higher than the 2019 peak. The average daily rate was 5% higher than 2022, and up 13% from 2019, while occupancy climbed 6.4% in 2023. Occupancy was the only metric still below 2019 levels, about 1% lower, although significantly higher rates pushed the RevPAR higher.

The greatest gains came in China and the EMEA (Europe, Middle East, and Africa), where RevPAR rose 24% and 72%, respectively. In the Americas it climbed 7% year-over-year.

In addition, the portfolio grew with 275 new hotels opened in 2023, with 27% of them coming in the fourth quarter with the addition of Iberostar hotels into the IHG portfolio. Overall, there was a net gain of 3.8% in terms of the total number of rooms opened in 2023. As of Dec. 31, the chain had more than 946,000 rooms in 6,363 hotels, with 66% in the midscale segments and 34% in upscale and luxury segments. The midscale area was bolstered by the launch of the Garner brand of hotels in the U.S. in September of 2023.

IHG’s strong performance helped it improve its financials and, in turn, reward shareholders. Its net cash from operating activities climbed 38% to $893 million and its adjusted free cash flow rose 45% to $819 million. This allowed IHG to return $1 billion to shareholders in 2023, with $750 million in share buybacks and $245 million in dividends distributed.

That will continue in 2024, as the company announced plans to return $800 million to shareholders this year in share repurchases, as well as another $200 million-plus in dividend payouts. Share repurchases typically have the effect of not only buying out shareholders who want to cash out, but it helps the stock price as shares are typically worth more when there are fewer on the market.

Bullish outlook

IHG CEO Elie Maalouf remains bullish on the company, and the industry, this year and over the next few. In terms of industry growth, he said hotel revenue has grown faster than the global GDP in 19 of the 23 years since 2000.

Also, he cited research by Oxford Economics that forecasts a compound annual room night growth rate for the industry of 4% through 2033. The U.S. growth rate alone is targeted at 2.7%, while China is at 4.2%. This should be assisted by a further recovery in occupancy levels for business travel and meetings and events; increased international flight capacity; and the potential for room rate increases driven by higher demand.

“The travel industry has attractive, long-term drivers of demand, and the strength of our brand portfolio and enterprise platform will continue to boost our RevPAR and system size growth. Combined with our scale and cost base efficiencies, this will further expand fee margin. IHG’s strong cash generation supports investment in growth initiatives, sustainably increasing our ordinary dividend and the regular return of surplus capital such as through buybacks,” Malouf said in the earnings release.

Is IHG a buy?

As for IHG’s outlook specifically, the company has more than 2,000 hotels in the development pipeline, with 40% of them under construction. The pipeline represents another 300,000 hotel rooms.

Further, it anticipates high-single digit percentage growth in fee revenue annually, on average, over the medium- to long-term, with fee margin expansion of 100 to 150 basis points annually, on average, in that period. Also, the company anticipates compound growth in adjusted EPS of 12% to 15% annually, on average, over the medium- to long-term.

The stock is still pretty reasonably valued, even with this surge in price, with a forward price-to-earnings ratio of 24 and a five-year P/E-to-growth (PEG) ratio of 1. With its momentum and outlook, backed by robust travel industry tailwinds, along with solid financials, IHG looks like a pretty solid long-term option. But given this rally, it might be prudent to monitor things and look for a dip after this all-time high.