Last week, after sterling moved above the $1.60 barrier, holiday and hotel-related stocks bounced too. But while a stronger pound should encourage more British tourists to travel aboard, this is just a tiny boost for a leisure sector being hammered by a massive recession.
Take InterContinental Hotels, the world’s largest hotel group. Shrinking corporate and consumer budgets are bad enough, but there’s a longer-term shift in business travel to contend with too. Cisco recently said it had permanently slashed its travel budget by more than half by being smarter with technology. The networking giant has upped its use of video conferencing and now holds on average 4,700 ‘virtual’ meetings each week, saving around $400m a year.
InterContinental Hotels (LSE: IHG), rated BUY by Société Générale
We could also see a similar decline in tourism, as more consumers select domestic holidays rather than costly foreign destinations. With demand shrinking, logically supply should follow. But not at InterContinental. Instead, it’s expanding capacity by around 8% this year. Sure, there may be growth left in India, Brazil and China, but bringing on more room-space looks like an own goal and could stretch its £1.3bn debt load.
The bulls note InterContinental’s property-light model. It’s sold most of its freehold sites over the past six years, and now derives 86% of profits from managing its branded hotels for third parties, or licensing its name to franchisees. This has cut its operational gearing and cushioned it from the worst of any slump. But it’s a very cyclical industry. With revenue per available room already down 13.6% in the first quarter, a number of its free-hold investors could soon go bust.
Analysts expect 2009 sales and adjusted earnings per share of £1,047m and 46.7p respectively. These estimates look like a leap of faith, especially given its exposure to North America (65% of EBITA) and job losses in the City – once a lucrative source of income for hoteliers. At 670p, the stock trades on toppy 12 times 2009 EBITA.
I’d value it on a multiple of nine, which recognises its premium brands, but adjusts for the cyclical nature of the sector. Time to check out.
Recommendation: SELL at £6.70
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments