NEW YORK— After showing faith in a speedy hotel industry recovery back in November, Goldman Sachs is continuing with its positive lodging forecasts, predicting that RevPAR will turn around by the end of 2002 and supply deceleration will help boost investor interest. Steven Kent, hospitality analyst/Goldman Sachs, held a quarterly earnings preview conference call on Jan. 7, stating that the fourth quarter 2001 may not prove to be as bad as everyone anticipated. Kent listed a few surprises expected to beat estimates in the quarter, including Hilton Hotels Corp., Starwood Hotels & Resorts, and MeriStar Hotels & Resorts. “All could beat forecasts by a penny or two, and all will be cost driven,” he said, noting that it is the companies tighter cost-control measures that will lead to better-than-expected earnings. However, Kent expects Four Seasons to disappoint investors in Q4, largely due to the devastating hit felt by the luxury segment after Sept. 11. “The New York Pierre, I think, had a dreadful quarter,” he said. “However I think investors will probably look right past this Q4 miss. In fact, its stock went up today even with expectations that it was going to miss the quarter.” Since Goldman Sachs reported it had a bullish outlook on the hotel industry back in November 2001, major lodging stocks have gone up 17%. The three most favorably affected were Fairmont Hotels & Resorts, Marriott International, and Four Seasons, which each saw stock prices climb 20%, 13%, and 24% respectively. Kent noted that there are three factors attributing to future hotel stock increases, the first being supply growth. Since 2000, supply growth has slowed considerably and is expected to drop even lower over the next two years. In 2000 supply growth reached 2.7%, then dropped to 2% in 2001. This year is expected to see growth of only 1.4%, and 2003 is expected to plummet to 0.6%, the lowest supply rate growth since 1992. “This really shows the deceleration that we think investors are going to focus in on,” he said, adding that 2003 will also mark the greatest supply and demand spread the industry’s experienced since 1978. In the past 16 years there have been eight periods where demand outpaced supply, and in seven of those eight years, lodging stocks out-performed. The second reason lodging stocks will improve is because estimates need to go higher. All of the cost-cutting measures implemented by hotels in the fourth quarter will help carry the lodging stocks into 2002, and “we’ll have to raise estimates by 10% to 15%. We think investors will be surprised by the margins achieved in Q4 even with dismal RevPAR,” he said. The third factor projected to boost lodging stocks is aggressive and optimistic management team strategies. Kent noted that hotels have seen a resurgence in conference and conventions, “and are on track to meet or beat last year’s numbers… The fact that they’re not losing events, we think, is a very good sign.” Though several markets, specifically San Francisco, Orlando, and Hawaii, are still expected to suffer in 2002, all in all, things are looking up. First and second quarter RevPAR will continue to be negative in ‘02, but Kent expects those numbers to show significant improvement by the year’s end.
