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We're mostly above the Street but we suspect Q2 earnings season could mark a near term top in the stocks

CALL TO ACTION

Very strong Q2 RevPAR translates into upside revenue and EBITDA revisions for the lodging operators and REITs, but could Q2 earnings season represent the near-term peak in the stocks?

SET-UP

During Q2, US RevPAR growth developed slowly due to the April calendar shift vs the prior year.  However, the April showers transitioned to a robust May and June. May posted Upper Upscale RevPAR growth 7-8% while June moderated slightly.

We believe HLT and H have the most upside versus current consensus estimates and even we might be conservative.

DETAILS

Despite the optimism by lodging management teams surrounding the recovery of the Group travel segment, their 2014 annual guidance commentary and expectations remained somewhat muted.  However, the strong Q2 RevPAR results should contribute to an earnings season of EBITDA and EPS beats.  We believe the street will revise lodging estimates higher over the coming weeks.

When we reach “the news” (the Q2 earnings releases), expectations should be elevated.  Going forward, there are some warning signs that Q2 earnings and higher 2H estimates could represent the near term peak of sentiment. 

Namely, we are concerned by the sizable insider selling across lodging c-corps and REITs during Q2 – despite “fifth inning commentary”.  Next, our Hedgeye Industrial team is warning of slowing airline operating metrics in June – a trend our counterpart expects to continue into 2H14.  Third, we are mindful of somewhat higher consumer prices, which act as a tax on consumer spending and a headwind for all consumer discretionary stocks.  Indeed, the head of tourism marketing for New York City was recently quoted as saying that spending by NYC tourists was not as robust as he expected.

Don’t get us wrong – we like the hotel fundamentals and business spending remains strong.  Our long-term outlook (and very near term) remains positive.  However, for traders and investors looking to take some profits, late July/early August might be an opportunistic time.

Our Q2 estimates as compared to the street are as follows:

LODGING: STRONG EARNINGS SEASON - a

LODGING: STRONG EARNINGS SEASON - b