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Lodging and Timeshare Outlook Remains Strong, Montgomery Securities Analyst Says

SAN FRANCISCO - Sept. 25, 1997 / Strong profit growth and stock price appreciation for the lodging and timeshare industries should continue into 1998, according to Michael G. Mueller, lodging industry analyst for Montgomery Securities. Mueller's presentation, entitled "How Suite It Is," highlighted how lodging companies are benefiting from the current favorable supply/demand environment.

"The lodging industry is one of the few segments of the economy with pricing power, which should result in record profits in 1997 and 1998," Mueller said. Mueller made his comments at the Montgomery Securities 27th Annual Investment Conference, the largest annual investment conference devoted exclusively to growth stocks, which is running now through September 26. More than 1,000 institutional investors are attending the conference, which features 235 growth companies and 25 analyst-led workshops. Among the lodging and timeshare companies making presentations at the conference are: Hilton Hotels, Host Marriott, Patriot American Hospitality, Signature Resorts, Starwood Lodging and Vistana.

Mueller detailed for investors the favorable conditions currently affecting the lodging and timeshare industries. After a period of overbuilding in the 1980s, the balance between supply and demand in the 1990s has swung in favor of hoteliers, with an undersupply of rooms existing particularly in the urban, upscale full-service and extended-stay segments. As a result, room rate growth has exceeded inflation since 1994.

Mueller highlighted the following five areas within the lodging sector that are particularly attractive:

Urban, Upscale, Full-Service Hotels

Mueller noted that the urban/upscale hotel segment is attractive as there is strong demand and limited supply growth, translating into significant pricing flexibility. Demand is up as a result of the healthy economy and increased business and leisure travel. Some of Mueller's recommendations in this area include: Doubletree/Promus, FelCor Suite Hotels, Host Marriott, Hilton Hotels, Marriott International, Patriot American and Starwood Lodging.

Extended-Stay Segment

Mueller said that extended-stay hotels are another attractive area for investors: "These are basically hotel rooms with kitchens, and demand is far greater than supply." Mueller's stock selections in this segment include: Candlewood, Prime Hospitality and Innkeepers USA Trust.

Extensive Remodeling/Repositioning

The third interesting area in this industry, Mueller said, is the remodeling and repositioning of "older, well-located hotels to 'like-new' condition." Hotel operators can buy these hotels at attractive prices that are less than the cost of building a new hotel from scratch, and the hotels then generate high returns after the repositioning is completed. Mueller's stock choice in this segment is La Quinta, which just finished remodeling its entire chain this spring. Other recommendations include: American General, Bristol Hotel and Servico.

Lodging REITs

Lodging REITs, Mueller said, "are a great way to participate in the hotel industry's recovery." They have been growing rapidly: at the beginning of the 1990s, there were two lodging REITs with a combined market value of $100 million; today, there are 14 lodging REITs with a combined market value of $13 billion. Successful lodging REITs are characterized by: experienced management; a well-maintained, high-quality asset base; hotel holdings with strong proprietary positions in their markets; a proven track record; a financially sound acquisition and development strategy; and a strong balance sheet. Among Mueller's stock selections in this area are: FelCor Suite Hotels, Starwood Lodging, Patriot American, Innkeepers USA Trust and RFS Hotel Investors.


"We're very excited about the timeshare business for several reasons," Mueller said. "It's growing very fast--both in terms of total sales and number of timeshare owners--and it has strong consumer appeal." Mueller said consumers perceive timeshares as a good value, and the exchange privileges that come along with the unit are seen as flexible and convenient. For timeshare operators, the industry offers excellent unit economics and the opportunity to earn additional profits by financing consumer purchases of the units. Mueller said the timeshare business remains fragmented, with the industry leaders (Signature Resorts and Marriott) each holding only 5 percent of the market. Mueller's recommended stocks in this area are Signature Resorts, Trendwest and Vistana, with Signature being the most rapidly growing company in the group.

Montgomery Securities is one of the nation's premier investment banking and institutional brokerage firms. Dedicated to growth companies, Montgomery combines focus and specialization in research and investment banking with bulge-bracket capabilities in global distribution and large-block trading. Montgomery has offices in San Francisco, New York and Boston. Montgomery has agreed to be acquired by NationsBank Corporation and will be merged with NationsBanc Capital Markets, Inc. to form NationsBanc Montgomery Securities Inc.


Montgomery Securities

Jennifer Smith, 415/249-5968

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