Industry Seeks Investors, Aims To Balance Supply And Demand

NEW YORK? Is Wall Street ready to dance again with lodging? Well, maybe. The industry has certainly been primping itself, cutting back on fattening development, balancing its diet of supply and demand, and strengthening its fundamentals to become more attractive to investors. The efforts aren?t going unnoticed. Of late, analysts from financial-services firms such as Goldman Sachs and Bear Stearns have cast a more favorable eye at lodging, suggesting the sector?s stocks might lose their wallflower-like status in the market and stop languishing.?We had two bad years in a row where lodging stocks were down in an up market,? said Jason Ader, senior managing director at Bear Stearns. Ader last month upgraded his outlook on the industry and pushed Four Seasons Hotels & Resorts, Hilton Hotels Corp. and Marriott International from a ?neutral? position to a ?buy.? He retained his ?buy? rating on Starwood Hotels & Resorts. ?As we got into the beginning of this year it became increasingly apparent to us that investors were looking for industries that had lagged, businesses that were throwing off cash flow that didn?t trade at the high multiples we see throughout the technology sector and other areas of the market,? Ader said. With industry indicators pointing to a slowdown in supply growth and predictions by Pricewaterhouse Coopers of a first-quarter trough and subsequent reacceleration in RevPAR, the sector dynamics help support such a call, said Ader. ?Maybe most important is valuation levels. We tend to value lodging companies based on their enterprise value? the market value plus the debt divided by EBITDA [earnings before interest taxes depreciation amortization]and typically lodging companies have traded between 5.5 times EBITDA and 12 times EBITDA. When we did our upgrade they were trading at 6.5 times EBITDA, so they were at the low end of the range with these two trends that could be perceived as positive events in the future. ?That was really the reason for the upgrade. To call attention to this group that had been ignored by investors to say, ?Hey, these stocks are cheap.?? ?Inexpensive? is the preferred lodging stock descriptive offered by Steven Kent, vp/senior analyst for hospitality research at Goldman Sachs. Last December, the company upgraded lodging from what Kent called ?a very bearish underweighted position to a more neutral market-weighted position? and cited both Marriott and Four Seasons as favorite stocks for 2000, placing them on Goldman Sachs? recommended lists for U.S. and Canadian stocks. ?We believe the stocks have troughed and rather than continue a downward trajectory as they?ve done for the past two years we think they?re more likely to just tread water here and sort of bounce along the bottom or show lackluster stock performance,? said Kent. ?This environment reminds us very much of 1990 when the market recognized that the sector was overbuilt and the stock underperformed, but by 1992 the stocks began to bottom out and build a basis for extended out performance. ?We don?t expect the stocks to rally substantially in 2000. Instead we think they will bounce around here for a year, maybe even two years. and then start to rebound.? Kent said being placed in a neutral position is ?pretty good ? for the sector, and noted the overall market expectation is that the Standard & Poor?s 500 will be up ?around 8% or 9%, so being up between 0% and 10% isn?t so bad compared to the past two years when they?ve dramatically underperformed the market.? Since Goldman Sachs called a downturn on the sector in December 1997, lodging stocks have been down almost 90% on a relative basis to the market, added Kent. Each Wall Street firm has its own rating categories, so when each one upgrades it means something else, noted Bjorn Hanson, who heads PricewaterhouseCoopers? hospitality and leisure group. ?The upgrade is kind of a soft message rather than a strong recommendation. The message is you no longer have to avoid these comp