We ask because we have been broadly in favour of holding them through 2004, as the industry snapped back from the effects of recession, terrorism, war and epidemic. But now, CSFB, which boasts the City's most respected leisure sector analysts, is advising clients to "underweight" the hotels sector.
The share prices of Hilton, InterContinental Hotels, De Vere and Whitbread have been at five-year highs now that the high-spending business traveller is re-emerging and hotels are getting booked up again for corporate conferences. At the same time, the debt-fuelled Western consumer spending splurge continues, with holidays back at the top of the shopping list.
CSFB's caution is based on valuation measures including the ratios of market capitalisation to stated asset values and sales. These are close to all-time highs, relative to the market. Only Millennium & Copthorne, heavily exposed to the Asian market, got a kind word from CSFB yesterday. Asian hotels are seeing more visitors now than their historical average. Elsewhere, occupancy rates are still below average, despite improvements since the trough and the leap in profits this caused in 2004. A consumer slowdown will be a drag from here. Investors could be disappointed if they believe hotels will easily be able to raise prices this year, outside major centres such as London and New York. Hilton is at particular risk of disappointing, CSFB says.
The bull case would be that valuations are justified because of the industry restructuring which is seeing many operators, notably InterContinental and Whitbread, selling their hotel assets to concentrate on running, rather than owning, them. This makes them more fleet of foot, better able to expand, and frees up billions to return to shareholders.
These financial restructurings, though, are not new, and their fruits can be overestimated. Now seems a good time to follow CSFB and take profits.