Goldman Sachs Analysis of the U.S. Lodging Sector Prospects

Goldman Sachs Analysis of the U.S. Lodging Sector Prospects

Goldman Sachs has embarked on a thorough examination of the U.S. lodging sector, bringing to light a nuanced perspective of its future trajectory. As 2024 approaches, the environment remains complex, with numerous companies readjusting their forecasts, which has stirred concerns regarding the peak of the lodging cycle.

Despite these challenges, the analysts at Goldman Sachs exhibit a cautious optimism. Their insights suggest that favorable macroeconomic conditions could bolster long-term growth despite the hurdles faced by the sector. The lodging industry in the U.S. is currently navigating a fluctuating landscape, characterized by apprehensions about late-cycle dynamics.

This year has seen many firms lowering their forecasts for the latter half of 2023, which raises questions about the sector's potential to maintain its existing momentum. However, Goldman Sachs believes that much of the anticipated downside has already been factored into the market, with investor expectations for Revenue per Available Room (RevPAR) having moderated.

Crucially, the brokerage's macroeconomic outlook points to a robust U.S. GDP growth alongside an upward trend in disposable personal income into the next few years. These factors collectively contribute to a more optimistic viewpoint for the lodging sector.

Highlighting key industry themes, Goldman Sachs predicts a slowdown in RevPAR growth, with projections of just 1.2% increase in 2024 after a strong performance in the previous year. A recovery in business and group travel is projected to contribute to a rebound by 2026.

This cycle stands out from previous ones, notable for its accelerated recovery yet faced with lasting challenges in occupancy rates and supply constraints. The emergence of asset-light business models has been a significant development, enhancing earnings stability across various companies.

However, timeshare operators may experience vulnerabilities in the upcoming period. Companies like Hilton Grand Vacations and Marriott Vacations could be affected by waning consumer sentiment and increasing loan losses. Even with stock appreciations recorded in 2023, there remains potential for further growth as valuations are still underpinned by solid free cash flow models.

In their detailed analysis, Goldman Sachs has made several stock recommendations within the lodging landscape, emphasizing investments in businesses characterized by strong free cash flow, resilient earning prospects, and reduced exposure to macroeconomic risks:

Hilton Worldwide Holdings (NYSE: HLT) – Buy – $245 price target

Hilton is positioned as a leader in the sector, benefiting from considerable supply growth even amidst restricted construction activities in the U.S. Through strategic partnerships and mergers and acquisitions, along with its asset-light approach, Hilton is anticipated to chart a robust growth path. Investors can find confidence in Hilton’s compounding free cash flow, making it a preferred choice for those seeking stability and growth potential.

Wyndham Hotels & Resorts – Buy – $96 price target

The company’s aggressive room expansion, backed by ECHO developments and improved franchisee relationships, sets Wyndham apart. Analysts expect Wyndham to achieve approximately 4% growth in room additions for 2024 and 2025, coupled with a valuation that remains appealing. Ancillary revenue streams are expected to drive EBITDA growth, enhancing overall valuation.

Marriott International – Buy – $267 price target

Marriott's significant focus on luxury, urban, and full-service hotels uniquely positions it for recovery as business travel and group events increase. The existing valuation gap when compared to Hilton has widened, but analysts foresee closing this gap as the market acknowledges Marriott’s long-term growth capabilities.

Hyatt Hotels – Neutral – $151 price target

Hyatt has adeptly shifted to an asset-light strategy. However, its greater exposure to macroeconomic challenges and hurdles in luxury hotel developments render it less favorable relative to its competitors. Still, the company’s balanced risk-reward profile suggests potential for moderate upside.

Travel + Leisure Co. – Neutral – $44 price target

Travel + Leisure's fundamental operations remain stable, but rising provisions for loan losses and consumer uncertainties keep analysts cautious. Recent strategic acquisitions, like those of Accor and Sports Illustrated, may provide future advantages, yet the stock is currently regarded as fairly valued.

Choice Hotels International – Sell – $105 price target

Goldman Sachs expresses caution for Choice Hotels, viewing its growth targets as overly ambitious in the face of declining cash flow conversions. As tough comparisons emerge following Radisson synergies, the stock faces challenging conditions in the near future.

Hilton Grand Vacations – Sell – $31 price target

Hilton Grand Vacations is currently grappling with significant issues, including increasing delinquency rates and integration disruptions relating to its Bluegreen Vacations acquisition. With a weakening consumer interest in high-end purchases like timeshares, potential upside is apparently limited in the foreseeable future.

Marriott Vacations Worldwide – Sell – $62 price target

Similar to Hilton Grand Vacations, Marriott Vacations is under pressure due to consumer headwinds and escalating delinquency rates. Its reliance on discretionary spending and specific market challenges complicate the company's outlook, leading Goldman Sachs to anticipate further struggles until these matters are resolved.

Frequently Asked Questions

What does Goldman Sachs say about the U.S. lodging sector?

Goldman Sachs has initiated coverage of the U.S. lodging sector with an optimistic perspective, despite some headwinds and challenges faced by the industry as we approach 2024.

Which hotel companies does Goldman Sachs recommend?

Goldman Sachs recommends investing in Hilton Worldwide Holdings, Wyndham Hotels & Resorts, and Marriott International, highlighting their strong growth prospects and financial stability.

What are the growth projections for RevPAR in 2024?

RevPAR is expected to increase by just 1.2% in 2024, following a strong performance in the preceding year, with further recovery anticipated by 2026.

Are there companies Goldman Sachs warns against?

Yes, Goldman Sachs provides sell ratings for companies like Choice Hotels International, Hilton Grand Vacations, and Marriott Vacations Worldwide due to various market challenges.

What future trends does Goldman Sachs foresee for the lodging industry?

The firm predicts a continued recovery in business and group travel, with asset-light business models enhancing earnings stability despite some occupancy challenges.

About Investors Hangout

Investors Hangout is a leading online stock forum for financial discussion and learning, offering a wide range of free tools and resources. It draws in traders of all levels, who exchange market knowledge, investigate trading tactics, and keep an eye on industry developments in real time. Featuring financial articles, stock message boards, quotes, charts, company profiles, and live news updates. Through cooperative learning and a wealth of informational resources, it helps users from novices creating their first portfolios to experts honing their techniques. Join Investors Hangout today: https://investorshangout.com/

Disclaimer: The content of this article is solely for general informational purposes only; it does not represent legal, financial, or investment advice. Investors Hangout does not offer financial advice; the author is not a licensed financial advisor. Consult a qualified advisor before making any financial or investment decisions based on this article. The author's interpretation of publicly available data shapes the opinions presented here; as a result, they should not be taken as advice to purchase, sell, or hold any securities mentioned or any other investments. The author does not guarantee the accuracy, completeness, or timeliness of any material, providing it "as is." Information and market conditions may change; past performance is not indicative of future outcomes. If any of the material offered here is inaccurate, please contact us for corrections.