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Hotels And Cruiseline: Valuations And Navigating Risk

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Hotels and Cruiselines And Navigating Risk – Reward by Hiland Doolittle, Capital Cube

The hotel/resort and cruiseline industry provides interesting insight into the state of the economy, consumer confidence and business travel trends. Presently, the industry is recovering quite nicely and suggests that consumers and businesses are enthusiastic about current economic events.

Value Line recently reviewed factors that impact the hotel/resort and cruise line sector. In considering investments in companies in the sector, it is important to know that the industry is divided into two distinctly different categories; companies that participate in solely the hospitality market and companies that participate in resorts and gaming.

Assets in this class are described as either upscale, mid-level or economy facilities which can provide services ranging from luxury accommodations, to full-service, limited service, international service or timeshares. The range of services in this sector is extremely diverse with occasionally unpredictable results.

Hotels, resorts and cruiselines generate revenues from room sales and bookings, management contracts, franchise agreements, vacation ownership programs, dining and asset sales and leases. Gaming resorts derive revenues from gaming, entertainment, retail outlets, restaurant and bar operations and from services such as gaming facility design and from the development, manufacture and marketing of electronic equipment.

Just as the industry paints a portrait of the global economy, many investors feel it is subject to significant risk that can pressure share prices. Certain competitors in his sector have achieved degrees of success over the past year. Today, we shall look at Wyndham Worldwide Corporation (NYSE:WYN) and Royal Caribbean Cruises Ltd (NYSE:RCL).

For hotels, resorts and cruise lines that are owned, managed or franchised, performance is usually related to revenue per available room (RevPAR) and average daily rates. Gaming operations are a bit more complicated and measure performance by slot handle, by “drop,” or money deposited in the facility’s security box, and by “win or hold” percentages. In hotels, resorts and gaming operations, volume is a key driver for share price.

A joint research project between Cornell University and Review Pro’s Global Review Index, has established an important trend in the hospitality industry. “Guest experience factors are now the #1 criteria travelers today use to select hotels.” The study demonstrates the impact of online reviews upon occupancy rates. Headed by Professor Chris Anderson, the Cornell-Review Pro study proves that the Global Review Index score of the 19 leading US-based lodging REIT’s definitely affects share performance. “If I increase my Global Review Index score by 1 percent, my hotel RevPAR increases by 1 percent,” Anderson told thousands of hotel and financial experts in his online e-conference review.

Wyndham Worldwide Corporation (WYN) Surging

The world’s largest hotel chain, Wyndham Worldwide Corporation (NYSE:WYN), has climbed steadily and looks to be doing everything right. Shares of WYN-US achieved a 52-week high on September 8, 2014. For the year, share price is up 35.45 percent.

Capital Cube’s Wyndham Worldwide company profile indicates that Wyndham Worldwide “operates through three business segments: lodging, vacation exchange and rentals and vacation ownership.” All three segments appear to be operating efficiently and ahead of its 2013 sales pace.

Cash flow is critical to the success of businesses in this sector. As Capital Cube portrays Wyndham Worldwide Corporation (NYSE:WYN) financials indicate that the company has significantly improved its cash and ST investments between the end of December 2013 and June 2014. On August 28, 2104, Wyndham announced it had secured its timeshare receivable conduit through 2016. Prior to this announcement the company’s timeshare receivable financing vehicle was set to expire in 2015. The financing facility has capacity for $650 million.

The most encouraging WYN news may be the opening of its first Wyndham Grand in China in Xi’an. The hotel is managed by Wyndham and owned by the HAOXIANGLAI Investment Holdings Company. The model is designed to accommodate business and leisure travelers.

WYN has offered a high quality dividend over the last five years. At the current price, the yield is 1.6 percent. Capital Cube’s analysis suggests that Wyndham Worldwide might see declining revenues in the future but shareholders have remained upbeat.

Price to sales is below peer medians and price to book and price to earnings are well below peer ratios. I like Wyndham’s relative consistency. An excellent marketer with social media awareness and highly rated reviews, look for the company to sustain its current market share and improve upon its solid 41.2 gross margin and 10 percent net margin. I see Wyndham Worldwide as a short-term investment opportunity.

Royal Caribbean Cruises Ltd (RCL)

Like WYN-US, shares of RCL-US also hit a 52-week high on September 5, 2014. Shares are up an impressive 80.54 percent during 2014. Royal Caribbean Cruises Ltd (NYSE:RCL) operates five cruise brands; Royal Caribbean International, Celebrity Cruises, Pullmantuir, Azamara Club Cruises and CDF Croisieres de France. On September 2, 29014, the company announced it was selling Celebrity Cruises to Exquisite Marine Ltd. The sale will result in a non-cash loss of $20 million. Royal Caribbean Cruises will continue to manage Celebrity until April 2015. While total company revenues and operating income are encouragingly improved, net margins need improvement. The company’s debt to equity is above peer median while return on assets is significantly below peer median. ROE remains challenging for Royal Caribbean Cruises whose 10.66 operating margin leaves little room for optimism. The dividend has only  a moderate cushion from the ending cash balance and the company’s dividend quality has not been consistent over the last five years. Royal Caribbean’s struggles to increase sales may be spurred by recent safety challenges experienced by competitors, but without consistent growth and more stable dividends, it is difficult to justify investing here.

The views and opinions expressed above are those of the author and do not necessarily reflect the views of  CapitalCube.com, AnalytixInsight, Inc., its affiliates, or its employees.


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