As part of Yahoo Finance's Travel Guide 2024: Industry Insights special, Baird Senior Research Analyst Michael Bellisario sharwes his top hotel stock pick: Choice Hotels (CHH). He calls Choice a "win-win" situation.
If Choice's acquisition of Wyndham Hotels & Resorts (WH) is approved, Bellisario sees significant synergy given that "bigger is better" in the hotel franchising industry. Even if the deal fails, he values Choice's "stand-alone" plan due to its strong balance sheet and earnings recovery.
Bellisario notes brands like Marriott (MAR) and Hilton (HLT) benefit from business travel loyalty. However, Choice and Wyndham rewards are more "immediate" while appealing to lower-end leisure guests. Still, merging could boost loyalty and rewards across both brands.
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Editor's note: This article was written by Angel Smith
Video Transcript
- Right. We'll talk about picking some more hotel stocks. And, Sozzi, stay with us here because you just mentioned the three bullish indicators that you are watching when it comes to the best plays. Well, that rebound in corporate travel, it's also a key theme that analysts are watching. It could have a big impact on the travel industry's winners and losers.
Let's dive into it as part of our Yahoo Finance's Travel Guide 2024 industry insights. We are diving into which is the better potential play for your portfolio when it comes to hotels, when it comes to Airbnb. Here, as part of that, we want to bring in Michael Bellisario. He's Baird, a senior research analyst, along with Brian Sozzi still with us here.
Michael, let's talk about those names that are best positioned. So Soz just laid it out. Buybacks and dividends expansion plans, also aggressive management style, it sounds like. To him, at least, separates the winners and the losers. One of those names, Choice Hotels, I believe, is your top pick. What do you like about Choice Hotels, and what do you see in terms of that upside?
- Thanks. Good morning. Yeah, with Choice, as you mentioned, they've gone hostile trying to acquire Wyndham. Our view on the stock is it's sort of a win-win. If the deal goes through-- and it's really up to the FTC at this point-- both companies have exhausted all avenues of from choice for their attempt, their hostile attempt, and Wyndham from their defense.
If the deal goes through, there's lots of synergies. Bigger is better in the hotel franchising business, and I think the public market is discounting lots of risks. And ultimately, I think, one to two years out post deal, people are going to be saying bigger is better. Look at all these synergies. They're going to be able to deliver, and they're going to be able to buy back even more stock.
And if the deal doesn't go through, we like the Choice standalone plan-- the recovery and earnings-- and their balance sheet's in phenomenal shape, and they're going to be able to buy back a ton of stock at a discount. So we view it as a win-win. It's very much an idiosyncratic story and call that we're making, but that's the setup we see for CHH today.
- Michael, some folks I've talked to on the Choice Hotels-Wyndham battle suggest that this-- Choice wants to make this deal to compete on loyalty with the Marriott and Hilton. Get more rewards members. Why not just go into a Marriott or Hilton, which are just larger companies? Are those the better plays?
- Well, bigger is better. That includes loyalty. I think when you think about the hotel brand business, it's all about one plus one is greater than two. When you have more dots on the map, owners are happier because more demand comes through the direct channels. Developers have a greater incentive to convert or build hotels, and guests have more options to stay in, and there's a nice flywheel there.
It's a different customer base for Wyndham and Choice in the lower-end chain scales than for Hilton and Marriott. The Hilton and Marriott customer, a lot of times the business traveler is earning his or her points and then redeeming them at aspirational resort properties. There aren't that many of those within Choice and Wyndham's portfolio, and a lot of the rewards for Choice and Wyndham are something to the extent of, stay nine nights, get the 10th free. A little bit more of an immediate reward.
But yes, bigger is better, and that includes the loyalty system. And I think when you look at Marriott and Starwood when that deal closed in 2016 and now Marriott just hitting 200 million loyalty members, they can leverage that platform. You see it with what Hilton and Marriott are doing with their credit card agreements. They're taking the people and their most loyal guests, and they're creating ancillary fee streams and profit streams that are very, very valuable and very sticky.
- Michael, take us to the other side of the trade here too. When you think of Expedia, of course, parent company of Vrbo, and then you've got Airbnb. What levers can they pull in this environment where we were laying out some of the pipelines that Marriott and Hilton have that they're going to be continuing to bring to market, whereas the other two are really focused on just making sure that people are listing their properties.
- Yeah. There's a much greater focus on the supply side there. So when you think about booking Expedia and Airbnb, very much focused on the leisure traveler. Leisure travel continues to normalize. I know that's an overused word, but people are still traveling. People are still spending money.
Yes, the growth rate is slowing-- I know you played the clip from Peter-- but it's still positive, and it's still good, and travel broadly is gaining greater share of people's wallet. They're not buying houses and they're not buying washers and dryers anymore. They're spending on other things, whereas the hotel brands, particularly Hilton, Hyatt, and Marriott, they benefit from business travel still recovering and large citywide groups and conventions still recovering too.
So there's much more of a business tilt to the demand side of the pie for the hotel brands, which is why the stock prices are still performing the way that they are.
- All right, Michael Bellisario, Baird senior research analyst. Thanks so much for taking the time to join us here this morning. Of course, our thanks to Brian Sozzi as well.