Excerpt from Seeking Alpha
- Since Marriott announced acquisition of Starwood, IHG’s stock has shown good price growth and has outperformed SPY.
- IHG has a long runway for growth and can use several levers to deliver continuous improvement in earnings.
- The relatively lower PE valuation multiple makes it more attractive than other peers in the industry.
- Long term investors should add this stock in their portfolio to achieve better returns in the medium to long term.
InterContinental Hotels Group (NYSE:IHG) has benefited from a bullish sentiment in the last few quarters. However, IHG has trailed behind industry leader Marriott International (NASDAQ:MAR). In 2017, MAR saw a jump of 60% whereas IHG showed a stock price increase of 38%. IHG has several strong factors working in its favor which should allow it to deliver high returns and easily beat the market in the future.
In my first article on Seeking Alpha in the last quarter of 2015, I wrote about the advantages which IHG will have due to Marriott’s acquisition of Starwood. Since the publication of the article IHG has outperformed the broader market by a wide margin.
The key reasoning behind by bullish thesis was that the consolidation in the lodging industry helps all players, especially the bigger ones, as it lowers the competitive pressure on pricing. In many markets there are now only two major hotel groups which helps both of them in increasing their average daily price (ADR) and occupancy levels.
Long term growth model
IHG has 786,000 rooms under different brands in 5,272 hotels. It also has 235,000 rooms in pipeline which represent close to 30% of the current rooms. This huge pipeline guarantees a good pace of new room growth in different markets. The system size showed a 4.1% growth in the latest quarter. In high priority markets like Greater China, the growth was 10%. In AMEA it was 14%.
At the same time, IHG has a “capital light” business model. This means that IHG does not own most of the properties which are branded under its name. This model helps the company during cyclical downturns while it also delivers rapid growth possibilities and a huge free cash flow. As the leisure and travel industry continues to grow in the next decade, IHG is in a great spot to take advantage of the growing customer demand. Its enormous size and brand recognition provides the economies of scale which is not possible to achieve for smaller players.
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