Hilton Worldwide Holdings Inc. (HLT)

One of the best-performing stocks in the hotel sector over the past year has been Hilton Worldwide Holdings, one of the largest hotel companies in the world with a market capitalization of nearly $30-billion (U.S.).  It franchises, manages, owns or leases more than 4,300 hotels, comprising more than 715,000 rooms in over 90 countries.  Its brands include the Waldorf Astoria, Conrad, Hilton, DoubleTree and Hampton Inn.
The Blackstone Group took Hilton private in 2007, restructured the hotel company and brought in a new CEO, Christopher Nassetta, who created an expansion plan.  Blackstone, happy with the progress, listed the company once again on the New York Stock Exchange in December, 2013, after selling IPO shares at $20.  The stock has since climbed more than 50%, has outperformed the S&P 500, and analysts rate Hilton as an outperformer.  Wes Golladay of RBC Capital Markets recently initiated coverage of Hilton, rating it an outperformer with a price target of $34.  Mr. Golladay echoes the sentiment of Deutsche Bank, Jefferies & Co., J.P. Morgan and Barclays Capital, all of which rate the stock as either a buy or a strong buy.

Blackstone remains Hilton’s largest shareholder, but it sold 207 million shares in 2014 and decreased its controlling interest to about 55%, with most analysts predicting Blackstone will continue unloading its position.

Analysts also anticipate Hilton will begin paying a dividend in the second half of 2015, which will attract new investors. RBC Capital’s Mr. Golladay predicts a quarterly dividend of 7.5 cents commencing in the third quarter of 2015, which works out to a yield of 1% based on current levels.

Hilton generates most of its revenue from the U.S., though it has singled out China as its primary source of expansion.  About 60% of Hilton’s pipeline developments are outside the U.S., with the Asia Pacific region accounting for more than half of the company’s hotels currently under construction.  Hilton also plans to introduce its Hampton Inn chain to China, with expectations of opening the first Hampton Inn by the end of 2015, and 400 in the long term.  Hilton has partnered with Plateno Hotels, one of the most recognized names in China with more than 3,000 hotels in 300 cities, to develop the Hampton Inn project.

Investors have expressed concern recently that expanding in China is not so easy, with longer development lead times and delayed project starts cited as the main obstacles, but Hilton’s partnership with Plateno helps the U.S. company better navigate Asia and nearly 70% of its developments in China are already under construction.

Starwood Hotels & Resorts Worldwide Inc. (HOT)

Starwood, another large and well-established hotel company, either franchises, manages,

owns or leases 1,222 hotels, comprising 354,225 rooms in 100 countries. The stock has not performed as well as Hilton over the past year, but it has an upward trend and has risen each year over the past three years.  Starwood’s brands include Sheraton, St. Regis, Westin and Le Meridien.

The company currently generates about 54% of its revenue from international markets, with a goal of 80% by 2016.  Starwood is very exposed to the Chinese market, which currently generates about 15% of revenue, a percentage that will increase substantially over the next two years.

About one-third of Starwood’s pipeline is in China, though the company has had some trouble securing financing for a handful of projects in the Tier 2 and Tier 3 cities.  The Chinese government has expressed a desire to slow a hot real estate market in smaller cities, which leads to longer wait times to begin development.  In the company’s third quarter conference call, Starwood management suggested many projects in China could take five or six years to complete compared with expectations of two or three years.  Starwood’s plan to increase exposure in China should provide good returns in the long run, but slower economic growth and longer lead-times for development could translate into lower relative growth for Starwood in the short term.

Mr. Golladay, the analyst from RBC Capital Markets, initiated coverage on Starwood last March with a sector perform rating and a price target of $84, while Deutsche Bank has set a higher target of $87.  In general, analysts are cooler on Starwood than Hilton, with firms such as MKM Partners and UBS Securities having recently downgraded their buys to neutral coverage.

Concerns about company include the ongoing search for a new CEO, following the departure of Frits van Paasschen, who resigned in February, 2015.  Adam Aron is the interim CEO until Starwood finds a permanent replacement.

Marriott International Inc. (MAR)

Marriott, another hotel stock that is outperforming the S&P 500, currently franchises, manages, owns or leases 4,175 properties, comprising 714,765 rooms in 80 countries.  Its brands include the Ritz Carlton, Marriott and Bulgari.

Nearly 80% of Marriott’s revenue is from operations in the U.S., but the company is beefing up its presence internationally with a focus on Beijing, Shanghai and Hong Kong.  It has a pipeline of about 150 hotels comprising 40,000 rooms in China, which it forecasts will be built by 2017, increasing its current exposure in the region by 86%.

Executives at Marriott have expressed worry that the Chinese market has a limited supply of experienced managers, and as a result the hotel company expects to manage most of its rooms in China on its own.

A notable difference between hotels in the U.S. and in China is the amount of food and beverage sales from the hotels.  In Asia Pacific, Marriott generated 23% of its total revenue from food and beverages in 2014, twice the amount by percentage in North America.  A key reason behind this is that many Chinese host weddings and special events at high-end luxury hotels.

Marriott also expanded its presence in Canada, having recently completed its $134-million acquisition of Delta Hotels and Resorts.  The company is the largest full-service hotel in Canada, with more than 120 hotels and 27,000 rooms.

Marriott trades at a premium to other hotel companies, but it is warranted because the company has higher earnings before interest, taxes, depreciation and amortization (EBITDA) growth.  Mr. Golladay of RBC Capital Markets initiated coverage of Marriott International in March, 2015, with an outperform rating and a price target of $94.  JP Morgan and Barclays both have an overweight rating on the stock.