Hospitality Stocks Look Downright Welcoming

The long-suffering hospitality industry seems to be over the worst. Hotel and motel occupancy rates in 1992 posted their biggest increase in 10 years. And new-room construction hit a 30-year low, bringing supply and demand closer in line.

Can investors get in on the turnaround? "There aren't many pure plays in hotel stocks," says Tom Graves, a Standard & Poor's analyst. The best-known public companies all get big chunks of revenue from other businesses--gaming for Hilton Hotels and Promus, food service for Marriott. Luckily, the recent luster on hotel stocks doesn't just reflect the cyclical upturn. It's a response to strategies that could mean years of better earning power.

BRIGHT LIGHT. Hospitality Franchise Systems, the world's biggest hotel franchiser, went public in mid-December at 16 and has seen its stock soar above 30. The warm reception was partly due to confidence that HFS's Days Inns of America, Ramada, and Howard Johnson properties will keep drawing visitors. And last month, HFS bought the Super 8 Motels chain, adding a budget franchise that won't pirate from the others. Based on the purchase, Michael Mueller at Montgomery Securities in San Francisco has boosted his earnings estimates for HFS from $1.16 per share to $1.30 in 1993 and $1.60 in 1994. A smaller chain Mueller likes is La Quinta Motor Inns.

In Marriott's case, analysts are sanguine about a planned restructuring that will split it into two companies, one owning its hotels and one for management and services. Margo Vignola of Salomon Brothers thinks the management company could achieve 20% to 25% earnings growth in the next couple of years. And Mueller, who calls Marriott's reorganization "very positive," notes that its stock has climbed from 18 to 25 since the change was announced.

Hilton and Promus, meanwhile, are gambling on gamblers. Hilton, whose luxury hotels are taking a beating, is up against stiff competition in Las Vegas, where three new casinos will open in 1994. But pros still think Hilton's gaming side will gush cash--especially if it makes a splash with riverboat gambling. Legal in five states, this low-overhead business is already a winning one for Promus, owner of Embassy Suites, Hampton Inns, and Homewood Suites. Promus is planning four riverboat projects to complement its Harrah's casinos. Mueller sees earnings growth upward of 25% in Promus' fu-ture and likes its stock as a long-term bet.

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