Check In to Lodging Operators That Manage as Well as Franchise
Economic moats, stronger growth prospects, and other advantages cause us to favor operators that both manage and franchise hotels.
Among the global hotel operators we cover, we expect the companies that both manage and franchise hotels to generate the strongest growth and financial performance over the course of the cycle. Managed and franchised hotel operators have sticky, fee-based management and franchise agreements with high switching costs, resulting in well-established economic moats, high margins and returns on invested capital, lower capital expenditure requirements, and less-cyclical financial results. Long term, we expect InterContinental Hotels Group (IHG), Marriott International (MAR), and Starwood Hotels & Resorts (HOT) to generate the strongest financial results in the sector, but before building a position in these stocks, we'd wait for a price pullback leading to a compelling margin of safety; an uptick in employment growth; and reacceleration in industry revenue per available room growth.
Operators that both manage and franchise hotels have greater exposure to emerging markets and stronger unit growth prospects than pure franchisors. While pure franchisors generate higher margins and returns on invested capital, their lack of capability to manage hotels limits their growth prospects internationally. Many large and developing international markets, such as China and India, do not provide a favorable legal environment for hotel franchising. The lack of an adequate supply of hotel managers also limits the ability of pure franchisors to expand internationally. The result is that companies we cover that both manage and franchise hotels have stronger new-hotel pipelines and a greater concentration of emerging-market new hotels in their pipelines. For operators that both manage and franchise hotels, new-room pipelines as a percentage of total existing rooms average 24%, compared with an average of 12.4% for pure franchisors. Starwood and InterContinental in particular are strong in China, which represents approximately 30% of their pipelines.
Chad Mollman does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.