Analysts look for clarity in ‘informational black hole’
Analysts look for clarity in ‘informational black hole’
30 APRIL 2020 8:20 AM

With traditional performance metrics diving off a cliff, Wall Street analysts expect to spend the upcoming earnings season trying to get a clearer picture of the industry as a whole.

REPORT FROM THE U.S.—In an earnings seasons marked by its lack of clarity, one thing is abundantly clear according to Wall Street analysts who follow publicly traded hotel companies: The downturn the industry is seeing today is completely unprecedented.

As recently as fourth-quarter 2019, hotel companies were claiming they had relatively little impact from the spread of COVID-19, describing it largely in relation to its impact on China and other Asia/Pacific markets. Now it is the largest crisis in the industry’s history, sources said.

C. Patrick Scholes, managing director of lodging, gaming and leisure equity research at SunTrust Robinson Humphrey, said the closest comparison would be the month following 9/11, but at a scale two to three times the size.

“This is going to be an earnings quarter the likes of which we’ve never seen and hopefully never see again,” he said. “Although, I’d suspect the (second-quarter) numbers will not be pleasant either.”

Analysts are left to sort through the situation with no clear vision of when the crisis ends and without the aid of the typical metrics to gauge the health of hotel companies.

“It’s interesting that the actual earnings results don’t matter because the world is upside down,” Scholes said.

With typical key performance indicators such as revenue per available room and earnings before interest, taxes, depreciation and amortization expected to be down sharply, sources said they will be looking at alternate metrics, including how many hotels have closed and gauging liquidity.

Rich Hightower, managing director and lodging research analyst for Evercore ISI, said companies will be putting an added focus on outlining their balance sheets and liquidity during earnings season to explain how they are poised to withstand the prolonged loss in business. However, it seems like most of the publicly traded companies are well-positioned, he said.

Beyond that, those companies will have to address the “informational black hole” for investors, he said.

“Anything that can help investors and analysts create the building blocks of what the revenue and cashflow picture could be, or at least a base-case scenario” would be helpful, he said.

At the same time, investors must be wary that hotel companies don’t necessarily know any more about the macro picture than anyone else.

“When it comes to stock picking, I’d almost be better off if I was an infectious disease expert,” Scholes said. “The markets are rising on news of a possible vaccine or antidote.”

Instead, analysts should focus on asking about what hotel management teams can control, said Wes Golladay, director, equity research analyst at RBC Capital Markets.

“Everyone wants to know management’s views (going forward) but that’s a hard thing to ask,” he said. “No one has much visibility. I think where people have the most information of value is on cost controls.”

Michael Bellisario, senior hotel research analyst and VP at Baird, agreed that companies have “proved they have ample cash on hand to weather the storm” and because of that he’s somewhat optimistic about the sector.

“We’re starting to see light at the end of the tunnel on cities and states reopening,” he said. “The stocks are down a bunch, rightfully so, but where can we be surprised on the downside. It’s kind of hard to think of what (else could happen). We’ve written about all the cash burn scenarios, but it likely won’t be as bad as initially feared.”

Analysts agreed there will be added focus, particularly for hotel real estate investment trusts, on how many of their properties are closed. Other areas of focus for Bellisario include airlift to specific markets and major event cancellations going forward.

Among the REITs, he noted select-service owners such as Summit Hotel Properties and Apple Hospitality REIT are better positioned at the moment and are likely underpriced.

“They’re at a lower price point but are doing better than the big group box convention center hotels,” he said. “The market is not yet forward looking enough to say what things will be looking like at the end of the year.”

Analysts also seemed to agree that this downturn will ultimately spark mergers and acquisitions, but it’s as of yet unclear what form that will take.

“There is definitely a lot of private equity and private investors waiting on the sidelines, but the good news for public hotel companies is the vast majority of them have ample liquidity to get through this,” Scholes said.

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