Goldman Sachs Analyzes Trajectory for the U.S. Lodging Sector
Goldman Sachs has launched an in-depth review of the U.S. lodging sector, shedding light on a complex outlook for its future. As we move closer to 2024, the landscape remains intricate, with numerous companies adjusting their forecasts, raising eyebrows about whether we're at the peak of the lodging cycle.
Even amidst these challenges, Goldman Sachs analysts maintain a cautious optimism. They believe that favorable macroeconomic conditions could support long-term growth despite the hurdles currently faced by the sector. The U.S. lodging industry is navigating a volatile environment, with concerns about its late-cycle dynamics looming.
This year, many firms have downgraded their forecasts for the latter half of 2023, sparking questions about whether the sector can sustain its existing momentum. However, Goldman Sachs feels that much of the expected downturn has already been incorporated into market estimates, especially with investor expectations for Revenue per Available Room (RevPAR) having stabilized.
Importantly, Goldman Sachs' macroeconomic outlook indicates robust U.S. GDP growth along with an increase in disposable personal income over the next few years. These factors collectively create a more positive outlook for the lodging sector.
In terms of key industry themes, Goldman Sachs anticipates a slowdown in RevPAR growth, forecasting only a 1.2% increase in 2024, following a robust performance last year. They project that a rebound in business and group travel will help drive recovery by 2026.
This cycle is distinct from prior ones, marked by an accelerated recovery while also grappling with lasting challenges related to occupancy rates and supply constraints. The rise of asset-light business models has become a significant trend, improving earnings stability across various companies.
However, timeshare operators might face difficulties in the near future. Brands like Hilton Grand Vacations and Marriott Vacations could be impacted by shrinking consumer confidence and increasing loan defaults. Even though these companies saw some stock appreciation in 2023, there's still potential for further growth, supported by solid free cash flow models.
In its detailed analysis, Goldman Sachs has made several stock recommendations within the lodging sector, focusing on companies that exhibit strong free cash flow, resilient earnings prospects, and less exposure to macroeconomic risks:
Hilton Worldwide Holdings (NYSE: HLT) – Buy – $245 price target
As a leader in the sector, Hilton shows considerable promise with notable supply growth, even as construction activities in the U.S. remain constrained. Through strategic partnerships, mergers, and its asset-light strategy, Hilton is expected to continue on a strong growth trajectory. Investors can feel confident in Hilton’s compounding free cash flow, making it a solid choice for those seeking stability and growth potential.
Wyndham Hotels & Resorts – Buy – $96 price target
Wyndham stands out due to its aggressive room expansion, supported by ECHO developments and enhanced franchisee relationships. Analysts predict Wyndham will see about 4% growth in room additions for 2024 and 2025, along with a valuation that remains attractive. Additional revenue streams are expected to drive EBITDA growth, boosting overall valuation.
Marriott International – Buy – $267 price target
With a strong emphasis on luxury, urban, and full-service hotels, Marriott is uniquely positioned for recovery as business travel and group events rebound. The existing valuation gap compared to Hilton has widened, but analysts expect that this gap will narrow as the market recognizes Marriott’s long-term growth potential.
Hyatt Hotels – Neutral – $151 price target
Hyatt has successfully shifted to an asset-light model. However, its heightened exposure to macroeconomic challenges and obstacles in luxury hotel developments make it less favorable compared to its competitors. Nevertheless, the company’s balanced risk-reward profile suggests some potential for moderate upside.
Travel + Leisure Co. – Neutral – $44 price target
While the core operations of Travel + Leisure remain stable, analysts are cautious due to rising provisions for loan losses and consumer uncertainties. Strategic acquisitions, including those of Accor and Sports Illustrated, may offer future benefits, but currently, the stock is considered fairly valued.
Choice Hotels International – Sell – $105 price target
Goldman Sachs expresses caution regarding Choice Hotels, perceiving its growth targets as overly ambitious in light of declining cash flow conversions. As tough comparisons arise following Radisson synergies, the stock faces tough conditions in the near future.
Hilton Grand Vacations – Sell – $31 price target
Hilton Grand Vacations is facing significant challenges, including rising delinquency rates and disruptions related to the integration of Bluegreen Vacations. With waning consumer interest in high-end purchases like timeshares, potential upside appears limited in the near term.
Marriott Vacations Worldwide – Sell – $62 price target
Like Hilton Grand Vacations, Marriott Vacations faces pressures from consumer challenges and rising delinquency rates. Its dependence on discretionary spending and specific market issues complicate the company’s outlook, leading Goldman Sachs to foresee continued struggles until these concerns are addressed.
Frequently Asked Questions
What insights does Goldman Sachs offer about the U.S. lodging sector?
Goldman Sachs has begun covering the U.S. lodging sector with a cautiously optimistic outlook, even though the industry faces some challenges as we near 2024.
Which hotel companies are recommended by Goldman Sachs?
The firm suggests investing in Hilton Worldwide Holdings, Wyndham Hotels & Resorts, and Marriott International, citing their solid growth prospects and financial stability.
What growth in RevPAR can we expect for 2024?
RevPAR is anticipated to rise by only 1.2% in 2024 after a strong showing in the previous year, with further recovery expected by 2026.
Which companies does Goldman Sachs advise against?
Goldman Sachs has sell ratings for companies like Choice Hotels International, Hilton Grand Vacations, and Marriott Vacations Worldwide due to various challenges in the market.
What future trends does Goldman Sachs predict for the lodging industry?
The firm foresees a steady recovery in business and group travel, with asset-light business models promoting earnings stability, despite challenges in occupancy rates.
