Leisure, Gaming & Resorts
Fewer travelers visit Las Vegas during its hot summer, but it’s an important season for regional casinos and resorts.
“It’s pretty critical,” said Joel Simkins, gaming and leisure analyst with Prudential Equity Group. “Regional operators haven’t seen any meaningful impact from rising gas prices at this point. Last June, we had a massive increase in gas prices and it was a bit of a shell shock to consumers. As long as nothing radical (happens) compared with last year, most consumers have gotten used to the situation.”
One of his top picks is Penn National Gaming , a casino operator based in Wyomissing, Penn., with 16 casinos.
Another factor that has kept Simkins relatively positive on the leisure sector: the weak dollar. “If a room rate is $350 a night, that is pretty cheap for folks coming in form the U.K.,” Simkins added.
He also likes Steiner Leisure , which operates the spas on cruise ships, including Carnival and Royal Caribbean, as well as other destinations such as the Atlantis resort on Paradise Island. The company has very little debt, a lot of cash on its balance sheet, and its shares are trading at less than 15 times his 2008 earnings projections, Simkins said. “They will benefit from the roughly 27 cruise ships coming on line between now and 2011,” he added. “It’s an alternative way to play the long-term growth of the cruise industry.”
Though shares of hotels have skyrocketed in recent years on the back of the strong economy, several analysts and investors are still upbeat on the sector given a healthy balance between supply and demand.
"Supply is fairly modest and demand has been healthy,” said Robert LaFleur, gaming, lodging and leisure analyst at Susquehanna Financial Group. “Pricing power is still pretty significant but it has eased in the past year or so."
His top picks include Starwood , Hilton and Marriott ; he says they’re well positioned in the current environment, while Starwood and Hilton have been very aggressive overseas, which has worked out quite well.
Harry Curtis, hotel analyst at JPMorgan, said he expects the supply of upscale hotel rooms to increase less than 2%, as rising construction costs and condo conversions cap new room growth. Room rates should continue to rise, as should occupancy levels. As long as the economy grows above 2%, he said in a research note, shares of several hotel companies should rise 20% to 40% over the next year to 18 months. Curtis' Picks
Don Hodges, who co-manages the Hodges Fund, a $675 million multi-cap fund that invest in companies across categories, says hotel stocks are probably adequately-priced at their current levels, but profits will continue to grow because the costs of building new hotels is so expensive. He has held shares of Marriott for about two years.
“Anybody building a new hotel will have to charge a much higher rate to break even or make money, so if you already have a hotel in the marketplace you have a pretty good umbrella over you to raise rates,” he said. “Marriott is probably the best-situated.”
The summer is actually the slowest time of year for hotels, Business travel -- which accounts for the bulk of industry profits -- is heaviest in the spring and fall. That said, higher gas prices aren’t expected to have much of an impact on hotels this summer, while the weak dollar should actually boost business.
“The weak dollar helps U.S. hotels in two ways,” says Susquehanna’s LaFleur. “It makes it more expensive for Americans to leave and it makes it cheaper for foreigners to come here.”
Moreover, hotels with substantial operations overseas making profits in, for instance, euros, are getting an added boost when those profits are converted into dollars, he added.
(Editor’s Note:Susquehanna's Robert LaFleur, as well as Prudential's Bob McAdoo and Joel Simkins, do not own any of the stocks they cover, nor do their firms have investment banking relationships with the companies. Harry Curtis of J.P. Morgan and Ray Neidl of Calyon do not own any of the stocks they follow, but their firms do seek to do investment banking business with the companies they track).