Goldman, Morgan Stanley mostly bearish on lodging sector
Goldman Sachs initiated coverage of the hotel sector with a Neutral rating, saying that the industry's demand appears to be slowing. In conjunction with the note, the firm initiated coverage of Marriott (MAR) with a Buy rating and started coverage of LaQuinta (LQ) with a Sell rating. Meanwhile, Morgan Stanley cut its rating on Hyatt (H) to Underweight, its equivalent of a sell rating, and upgraded Marriott to Overweight from Equal Weight. GOLDMAN INITIATIONS: Demand appears to be slowing relative to the growth of supply in the lodging sector, while supply growth is poised to accelerate, wrote Goldman analyst Stephen Grambling. Additionally, the sector's multiples are starting to be weighed down by "disruptive technologies," he believes. However, in the wake of its acquisition of Starwood, Marriott has "attractive returns and location," attributes that are not fully reflected in the stock, according to Grambling. On the other hand, LaQuinta features "limited growth in the near-to-intermediate term, low returns and an uncompelling valuation," the analyst stated. LaQuinta is also coping with increased competition and may have to invest more in its hotels going forward, the analyst stated. He set an $81 price target on Marriott and a $9 price target on LaQuinta. MORGAN STANLEY RATING CHANGES: The lodging sector is facing "numerous industry-specific headwinds," warned Morgan Stanley analyst Thomas Allen. The sector's revenue per available room, or RevPAR, will rise just 1% next year, and the sector's multiples should drop by the end of the year, he stated. The analyst expects the sector to be hurt by increased supply, competition from alternative accommodation platforms, including Airbnb, and continued competition from the online travel agencies. Allen cut his view of the sector to negative from neutral. Hyatt has an "asset heavy business," and its exposure to "gateway cities" makes it more vulnerable to increasing supply and alternative accommodations, according to Allen, who cut his price target on the shares to $46 from $49. The combination of the new rooms being added by Marriott and its synergies with Starwood should enable the combined company's earnings before interest, taxes, depreciation and amortization to rise at a compound annual growth rate of 9% from 2016-2018, wrote Allen. He set a $78 price target on the shares. PRICE ACTION: In late morning trading, Marriott fell 1.2% to $67.64, LaQunita gave back 4% to $10.88, and Hyatt retreated 2.8% to $48.99.