In stark contrast to the predictability of Boeing, I believe that this hotel group is at the mercy of dwindling corporate and consumer spending. Worse still, with 69% of its profits generated from the Americas, it is exposed to the eye of the storm.
Intercontinental Hotels (IHG), rated a BUY by Evolution Securities
Intercontinental is the world’s largest hotel group, controlling 585,094 rooms in 3,949 branded locations including the Holiday Inn and Crowne Plaza chains. It is set to expand its capacity by 9% this year – equivalent to opening nearly one new hotel every day.
To me, this looks a stretch due to the present difficulties getting cheap finance for commercial property development. It’s also perhaps unwise as the economic climate deteriorates. Yes, there is plenty of growth left in the emerging markets of Russia, India, Indonesia and China (ahead of the Beijing Olympics) – yet the frail Americas region still accounts for around two-thirds of Intercontinental’s pipeline of new openings, with the remainder split between Europe and the rest of the world.
The bulls point towards the firm’s property-light model. Intercontinental has disposed of most of its freehold sites over the past four years, and now derives 86% of profits from either managing its branded hotels on behalf of third parties, or licensing its name to franchisees. But while this has cut operational gearing and thus somewhat cushioned it from the worst of a slump, let’s not kid ourselves: this is still an extremely cyclical industry. If there is a severe recession, with occupancy levels and revenue per available room both falling, then Intercontinental will not remain unscathed.
The City surprisingly (due to the more austere environment) still expects Intercontinental’s sales and earnings per share to grow to £960m (up 8.5%) and 53.7p (up 14%) respectively in 2008, and then rise at a similar clip in 2009. This is a huge leap of faith given the group’s hefty exposure to the US and ongoing job losses in the City – traditionally a lucrative source of income for hoteliers.
At 811p, the stock trades on toppy 2008 and 2009 p/e multiples of 15.4 and 13.6 respectively, which like one of its luxurious penthouse suites simply looks too expensive. I would value Intercontinental on a 2008 p/e multiple of 11 (or nearly 30% less than today), which recognises its premium brand, but adjusts for the cyclical nature of the sector. Its first-quarter results are due out on 7 May.
Recommendation: SELL at 811p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments