Under the Affluence

The lodging industry is being roiled with blockbuster merger activity, namely Hilton Hotels Corp.’s (ticker symbol: HLT) hostile $6.5-billion bid for Sheraton owner ITT Corp. (ITT), and Marriott International Inc.’s (MAR) pact to buy Renaissance Hotel Group (RHG) for $947 million.

Although more deals are likely, investors mulling lodging stocks today shouldn’t count on mergers to justify their picks, analysts say. But the Hilton and Marriott bids do point up a key trend in lodging: that the hot sector of the market is the upscale sector.

For the last year, stocks of hotel companies that run upscale full-service properties--including those involved in the deals above--have generally outperformed those operating mid-priced and budget hotels, and analysts expect that disparity to continue this year.

Among the upscale operators, Doubletree Corp.’s (TREE) stock has soared 62% over the last year, to a recent $43.25 a share; Host Marriott Corp. (HMT) has gained 36% to about $17.25; and Promus Hotel Corp. (PRH), whose holdings include Embassy Suites, has jumped 40% to $34.50 a share. (Marriott, which primarily manages hotels, and Host Marriott, which mainly owns hotels, were created in 1993 when the old Marriott Corp. split apart.)

Of the hotel stocks tracked by analyst W. Bruce Turner of Salomon Bros. Inc., 67% of the luxury operators bested the 20% gain of the Standard & Poor’s 500 in 1996, compared with only 33% of the mid-priced/economy hotel stocks.

The analysts’ explanation is simple: The supply of luxury hotel rooms is not nearly as ample as the supply of mid-priced and budget accommodations, in good part because the luxury hotel industry suffered miserably during the recession of the early 1990s and few dared build more expensive properties. Now the resulting tight supply of luxury and upscale hotels, combined with economic growth and strong consumer traffic, is lifting occupancy rates at the hotels, which are then able to raise prices and fatten profit.

The industry’s key measure of growth--revenue per available room--climbed 8.8% last year for luxury hotels, versus 6.1% for the budget sector, according to Lehman Bros. Inc. analyst Joyce Minor.

In fact, the gains enjoyed by the upper-end hotels mean “it appears 1996 will be another record year in profitability for the U.S. lodging industry,” breaking the record of $8.5 billion in pretax earnings posted in 1995, said Turner, whose “buy” list includes Doubletree and Promus.

“There has simply been very little new building of upscale/luxury properties over the past five years, and it is clear to us that there is little in the pipeline,” analyst Neil Barsky of Morgan Stanley & Co. said in a recent report.

The tightening availability of upscale rooms and the prospect of continued strong market conditions are also key reasons why Hyatt Hotels Corp. on Monday announced a $1-billion plan to buy luxury properties, and why Hilton is pursuing ITT: It wants to absorb the Sheraton chain.

That’s also why Hilton--despite the costs it would incur if it’s successful in buying ITT--is still being touted by some analysts, including Mark Mutkowski of BT Securities Corp.

Turner also continues to recommend ITT because its “fundamental outlook remains solid,” although he recently cut his rating to “buy” from “strong buy” because ITT’s price shot up after the Hilton takeover announcement. ITT is currently trading at about $57.75 a share.

Others, like Cowen & Co.’s Harold Vogel, are still touting ITT because they expect the takeover bidding for ITT to climb higher, perhaps to $65 a share or more. ITT shares, “in spite of the recent activity, remain undervalued,” he said.

In any case, the strong industrywide numbers mask weakness in the middle and lower ends of the market, where the oversupply of rooms is “making it more difficult for mid-priced and economy brands to raise rates,” Barsky said.

That’s why stocks of several mid-priced hotels have stumbled. Choice Hotels International Inc. (CHH), which runs and franchises such chains as Quality and Comfort, is off 7% for the last 12 months at a recent $15 a share, and Red Roof Inns Inc. (RRI), also at $15 a share, is up only 4%. Analyst Camille Humphries of Alex. Brown & Sons Inc. recently removed her “buy” recommendation on Red Roof.

That doesn’t mean all mid-priced hotel stocks are off-limits.

Shares of HFS Inc. (HFS), a rapidly growing franchiser of such hotels as Days Inn, Howard Johnson, Ramada and Travelodge, are recommended by Michael Rietbrock of Smith Barney Inc. and Mark Manson of Donaldson, Lufkin & Jenrette, even though the stock has already surged 48% over the last 12 months to a recent $67.25 a share. That’s because HFS also owns the Avis rental car agency, the Coldwell Banker and Century 21 realty operations and other holdings, and together the pieces should generate strong earnings growth, the analysts said.

La Quinta Inns Inc. (LQI), meanwhile, is a favorite of analyst David Gardner of Legg Mason Wood Walker Inc., which included the stock--currently at $19.25 a share--in its “Select List” for February.

Gardner said La Quinta will benefit from its room-remodeling program that should be completed this year, an expanding advertising campaign and the opening of 36 hotels by year’s end.

Another high flier in the economy sector is Extended Stay America Inc. (STAY), which, as its name implies, caters to business travelers and others who need extended accommodations but have limited budgets. The stock, at $20.50 a share, has soared 65% over the last 12 months and is now extremely rich relative to its recent earnings.

But Extended Stay, headed by billionaire H. Wayne Huizenga, is a young firm on an expansion binge that it expects will boost profit. Most recently it agreed to buy Studio Plus Hotels Inc. (SPHI), another operator of budget extended-stay lodging, for about $260 million in stock. And a group led by another billionaire, famed money manager George Soros, just bought a 5% stake in Extended Stay.

There’s one other hotel play getting attention these days: real estate investment trusts, or REITs.

Two that have been rising are Starwood Lodging (HOT), which has soared 80% over the last year to $40.25 a share (adjusted for a 3-for-2 split last month), and American General Hospitality Corp. (AGT), which has gained 54% over the last year and recently completed a secondary offering of 5.8 million shares priced at $27.25 a share.

Times staff writer James F. Peltz can be reached at james.peltz@latimes.com

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Luxury Leads

Stocks of mid-priced and budget lodging companies have generally lagged those of luxury-hotel operators, and analysts see the trend continuing. A look at some players in both sectors:

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Recent 12-month Stock Ticker price % change Upscale Doubletree TREE $43.25 +62% Hilton* HLT 26.25 +11 Host Marriott HMT 17.25 +36 Marriott International** MAR 54.75 +13 Mid-Priced/Budget Choice CHH $15.00 --7% La Quinta LQI 19.25 +5 Red Roof Inns RRI 15.00 +4 Suburban Lodges SLAM 19.00 --29 S&P; 500 +24

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* Launched bid to buy ITT (Sheraton) on Jan. 27

** Agreed to buy Renaissance Hotel Group on Feb. 18

Sector Shuffle

A ranking of 12 key sectors representing the U.S. economy, based on the last five days of trading on major equity markets.

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5-day Rev. EPS Sector %chg P/E Yield P/Book ROE Rev. Q/chg Consumer (non-cyc) 1.5 31.0 1.9 11.2 34.5 7.9 12.6 Consumer (cyclical) --0.1 19.6 2.5 3.5 18.2 8.9 22.0 Transportation --0.3 20.5 1.9 2.5 15.1 10.5 8.8 Financial --0.4 17.5 2.0 2.6 16.6 19.3 16.8 Basic materials --0.5 22.9 2.3 3.7 19.7 6.4 2.2 Utilities --0.6 15.0 5.3 1.8 12.2 17.9 5.9 Services --0.9 25.9 2.6 4.0 15.9 19.6 17.3 Capital goods --1.3 20.7 1.5 3.6 19.1 20.1 24.9 Conglomerates --1.4 22.8 1.9 4.7 19.9 9.2 14.3 Energy --1.5 19.1 2.8 3.2 17.2 28.6 36.5 Health care --1.8 28.5 1.6 7.6 24.8 16.7 21.8 Technology --3.1 31.6 0.9 7.4 23.6 25.0 33.4

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Source: Market Guide; all data as of Friday

Note: Each sector includes several industry groups, which in turn are made up of individual stocks. You can examine the industry groups and individual stocks that make up each sector at https://www2.marketguide.com/MGI/HOT/hotsect.htm on the World Wide Web.

Chart explanation: Sectors and sector data are weighted by market capitalization.

NM: Not meaningful; P/E: Friday price divided by most recent trailing one--year earnings; Yield: Annual return of dividend based on most recent stock price and recent dividend information; P/Book: Price-to-book; price divided by latest available quarterly book value per share; ROE: Return on equity, most recent available trailing 12-month period; Rev. and EPS: Revenue and earnings per share, percentage change in most recent quarter versus year-ago quarter.