The Giraffe is on record as the animal with the longest tail. Unfortunately, the current lodging depression may have a longer tail than any we’ve seen in quite a while. RevPAR peaked in the fall of 2007 at an all-time high. Occupancy has been falling since the spring of 2006 which should’ve been THE signal to sell the lodging stocks as it usually is. Likewise, as we discussed in our 01/07/09 post, “FILL ‘EM AND THEY (INVESTORS) WILL COME”, the stocks do not typically sustain rallies until occupancy begins an uptrend.

Unfortunately, we don’t appear to be close to trough occupancy as the rate of decline is accelerating, never mind going up. Further, we believe analysts are vastly underestimating the margin hit. Average daily rate follows occupancy down and recovers after as illustrated in the first chart. Rate has only just begun to fall. Rate changes have a much bigger impact on margins. As can be seen in the 2nd chart, margins follow rate pretty closely.

A few issues will exacerbate and extend the current downturn. The hotel environment deteriorated so quickly that 2009 will actually benefit from group and corporate business that was booked closer to the height of the cycle. Even if demand improves in 2010, business booked in 2008 and 2009 will be a major drag. Second, FX is a major headwind for lodgers with significant European exposure such as HOT. Third, the gateway US cities, especially New York, will face difficult comparisons as the global economy deteriorates with a lag to the US. Finally, timeshare operations, which have been a big boom to earnings and EBITDA, will be inconsequential until inventory is built back up. We are probably 5 years from that potential.

Our best guess is that 2009 is not the trough. RevPAR and EBITDA will likely decelerate further from 2009 levels. Margins will continue to compress, even with significant cost cutting, as ADR comprises the bulk of the RevPAR declines. Cost cutting initiatives, particularly by HOT, are aggressive and necessary. However, there is only so far a company can go without damaging its brand.

Occupancy drives stocks
ADR drives margins

SECTOR SPOTLIGHT | Live Q&A with Healthcare Analyst Tom Tobin Today at 2:30PM ET

Join us for this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more