Goldman Sachs has initiated coverage of the US lodging sector, offering a nuanced view of what lies ahead for the industry.
The note acknowledges that the backdrop for 2024 is challenging, with several companies adjusting their forecasts downward for the second half of 2023, raising concerns about whether the lodging cycle has peaked.
However, analysts at Goldman Sachs remain cautiously optimistic, citing favorable macroeconomic forecasts and resilient business models that provide long-term growth potential.
The US lodging industry faces a "choppy" environment marked by concerns of late-cycle dynamics so far this year.
Many companies have lowered their second-half forecasts, raising doubts about the sector's ability to sustain its current momentum.
Yet, Goldman Sachs believes that much of this downside has already been priced in, with investor expectations for RevPAR already moderated.
Importantly, the brokerage’s macro team projects stronger-than-expected US GDP growth, alongside accelerating disposable personal income into 2025, which supports a more favorable outlook for the lodging sector.
Goldman Sachs highlights key themes shaping the lodging sector, including a slowing RevPAR growth, expected to rise by just 1.2% in 2024 after a strong 2023, before rebounding by 2026, driven by business and group travel recovery.
This cycle differs from previous ones, with faster recovery but lingering occupancy challenges and supply constraints. Asset-light models have emerged, improving earnings stability.
However, timeshare companies face vulnerabilities due to weakening consumer sentiment and rising loan losses, impacting Hilton Grand Vacations and Marriott Vacations.
Despite stock gains in 2023, Goldman sees potential for further appreciation as valuations remain supported by strong free cash flow models.
Based on their analysis, Goldman Sachs offers several stock recommendations across the lodging sector, favoring companies with strong free cash flow generation, resilient earnings profiles, and less exposure to macroeconomic risks:
Hilton Worldwide Holdings (NYSE:HLT) – Buy – $245 price target
Hilton is seen as a standout performer, offering robust supply growth despite constrained construction activity in the US.
The company’s use of partnerships and M&A, coupled with its asset-light model, positions it for long-term growth. With free cash flow (FCF) compounding, Hilton remains a top pick for investors seeking resilience and upside.
Wyndham Hotels & Resorts – Buy – $96 price target
Wyndham is flagged for its accelerating room growth, driven by ECHO developments and improving franchisee retention.
The company’s ability to grow its room base by about 4% in 2024 and 2025, alongside its undemanding valuation, makes it an attractive investment opportunity.
Additionally, the company’s ancillary fee streams are expected to drive EBITDA growth and boost valuation.
Marriott International – Buy – $267 price target
Marriott’s high exposure to luxury, urban, and full-service hotels gives it a strong position for recovery, especially as business and group travel pick up.
The stock’s valuation gap relative to Hilton has widened, and Goldman Sachs expects this gap to close as the market recognizes Marriott’s long-term growth potential.
Hyatt Hotels – Neutral – $151 price target
Although Hyatt has successfully transitioned to an asset-light model, its higher exposure to macroeconomic risks and challenges in luxury hotel development make it less attractive compared to peers. Nonetheless, the company’s balanced risk-reward profile offers some upside potential.
Travel + Leisure Co. – Neutral – $44 price target
While Travel + Leisure’s core business remains stable, rising loan loss provisions and consumer concerns keep analysts on the sidelines. The company’s recent strategic acquisitions, including Accor and Sports Illustrated, could provide some upside, but the stock is considered fairly valued for now.
Choice Hotels International – Sell – $105 price target
Goldman Sachs sees downside risk for Choice Hotels, as its net unit growth targets appear overly ambitious.
With declining free cash flow conversion and tougher comparisons following Radisson synergies, the stock is expected to face headwinds in 2024 and 2025.
Hilton Grand Vacations – Sell – $31 price target
Hilton Grand Vacations faces significant challenges, including rising delinquencies and disruption from its Bluegreen Vacations integration.
As consumer weakness weighs on big-ticket items like timeshares, Goldman Sachs sees limited upside for the stock in the near term.
Marriott Vacations Worldwide – Sell – $62 price target
Like HGV, Marriott Vacations is vulnerable to consumer headwinds and rising delinquencies.
The company’s exposure to discretionary spending and challenges in Hawaii further complicate its outlook, and Goldman Sachs believes the stock will remain under pressure until these issues are addressed.