Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=162925
Story Retrieval Date: 5/23/2013 1:26:48 AM CST
Headquartered in Chicago, luxury hotel company Strategic Hotels and Resorts Inc. is building faith among investors, judging by its recent stock jumps. However, analysts are still forecasting a loss of 47 cents for this year and a 34 cent loss for 2011, rounding out four consecutive years of red ink.
Shares of Strategic, which owns and operates hotels under the Fairmont, Four Seasons, Hyatt and Westin brands, traded a year ago as low as 61 cents per share, but it's bounded back, increasing another 10.7 percent just since last Friday to $5.71, its highest since early November.
“They’ve reached bottom, they’ve survived and now they’re seeing recovery,” said Thomas O’Neill, president of Hotel Investor Services, a consulting firm to the hotel and resort industry.
However, some analysts say investors in luxury hotels need to be thinking long-term because the industry has a long way to go to return to its pre-recession state.
In fact, Strategic Hotels hasn’t reported a profit since 2007, when it made just over $39 million. In 2008 the company lost $344.3 million, and it did only slightly better in 2009, when it posted a net loss of $274.8 million.
And this isn’t the end of its income statement woes. The company is burdened by debt that arose from paying premium prices for properties that have failed to generate an adequate return. Strategic Hotels reduced its debt last year by only 5 percent to just over $2 billion, most notably by decreasing bank credit facilities to $178 million from $206 million.
Companies with high levels of debt may be more vulnerable to poor economic conditions. On the other side of that coin, some investors may favor companies with high levels of debt because they stand to gain the most as the economy starts to rebound.
However, Robert W. Baird & Co. Inc. analyst David Loeb asserts the company’s efforts aren’t nearly enough.
“We think the debt situation is pretty severe,” Loeb said in an interview. "We’re . . . not seeing justification for the large price move.”
If investors are looking for companies that are "most levered" to a recovering economy, Loeb went on, the typical trend is that earnings recovery will be faster for companies with the most debt. Strategic’s cheap stock has been trading at above average volume for this reason, he added, but he still gives it an underperform rating.
“We don’t think it’s cheap,” Loeb said. “They've reduced their debt, but there’s an awful lot more left to go.”
The company’s continuing unprofitable operations are a major source of concern for analysts, Loeb said. Revenues last year were off by more than a quarter from both 2007 and 2008.
By contrast, luxury competitor Hyatt Hotels Corp. reported a revenue increase of 2.6 percent in 2008 followed by a 13.2 percent decrease last year. Notably, Strategic owns only 17 properties compared with Hyatt's 430-plus hotels, resorts, residential and vacation ownership properties.
Strategic Hotels’ steep decline in revenue was due to the loss of high-rated group activity and the very profitable food and beverage business that went along with it, said James Mead, chief financial officer and executive vice president, in a Feb. 25 conference call. The lost traffic was only partially replaced with discounted transient activity. Strategic Hotels’ occupancy loss was limited to just under 6 percent, but the company lost nearly 16 percent in rate and 26 percent in food and beverage revenues.
But Chris Wonka of Deutsche Bank Securities Inc. said it is natural to expect some of that business to come back.
“We call it pent-up demand,” Wonka said. “Groups will meet again, they won’t hold off forever.”
Mead said in the conference call that he expects the first quarter of this year to be “the low point of the current cycle,” especially for Strategic’s major markets like Chicago where it operates the Intercontinental Chicago and Fairmont Chicago hotels.
The good news on the surface for Strategic is that over the next two years, analysts say certain luxury consumers will be back and more willing to stay at luxury hotels. But they will still be price sensitive, meaning the industry might not be able to demand the same level of premium for rooms as in the past.
“We’re going to see occupancy continue to rebound, but I don’t think you'll see very significant pricing power for some time,” Wonka said.
Wonka said the hotel stocks are lower dollar value stocks for a reason, but that he contends more people are buying into the idea of a broad economic comeback, particularly in hotels.
“Very few investors are willing to short stocks right now. It’s somewhat of a ‘perfect storm’ for these stocks to melt up,” Wonka said.
O’Neill said one of the benefits to the luxury sector is that there hasn’t been much new construction in the past few years and therefore no new competition. But that could change soon, forcing hotels to be competitive with their pricing. As a key market for new luxury hotels, Chicago is expected to see substantial construction in the next few years, coming off several years of slower-than-average growth, according to O’Neill.
In Wonka's view, Strategic Hotels is attractive to investors right now because of its high operation and strategic levels. He said there is not necessarily more of a demand for luxury than anything else right now, but the degree to which that market was hit in 2009 is largely the reason for the stock's recent outperformance.
“The short story of it is, if you’re buying on a multi-year recovery, it’s going to take a year or two to be proven right or wrong,” said Wonka.
However, Wonka said, he isn’t predicting Strategic Hotels will recover pre-recession value, when its stock sold for nearly $24 per share back in July 2007.
“I would be surprised to see it get back there. I certainly wouldn’t expect that in the foreseeable future,” Wonka asserted.