Shares digital

InterContinental Hotels Group (IHG) – 780p, stop loss 936p

SHARES SUMMARY

Watch trading updates from US peers over the next three weeks. The stock could look exposed after its recent sharp rally, as recent industry data suggests the key revPAR benchmark indicator is weakening.

Business:

International hotels group, which operates seven brands across 3,800 hotels in nearly 100 countries, offering 572,000 rooms to the globe’s travellers.

Vital stats:

Market value: £2,238 million

Historic PE 2006: 20.2

Prospective PE 2007: 16.4

Prospective PE 2008: 14

Sector PE (next 12 months): 16.1

1-month relative strength: -3.6%

1-year relative strength: -35.6%

Yield 2007: 3.2%

NMS: 18,750

Spread: 0.198%

The recent market volatility has been truly scary. Last Wednesday’s 632-point trough-to-peak swing in America’s Dow Jones Industrials was the fifth biggest such move on record. The FTSE 100 began the week with a crunching 324-point fall, yet ended it barely 30 points lower than it had begun.

As a result, the best move of all right now is probably to sit tight and not do much. But wild price swings can create opportunities for those traders who have a very high risk appetite, and last week’s 20%-plus rally from its intra-day lows by InterContinental Hotels Group means the shares look ripe for a fresh pullback.

InterContinental operates 3,800 hotels across the globe, under such well known brands as Holiday Inn and Crowne Plaza. Between June 2005 and May 2007 the shares soared from 650p to over £14. An aggressive organic expansion programme, designed to add 50,000 to 60,000 rooms to the group’s portfolio, coupled with a buoyant global economy and rampant merger-and-acquisition activity within the sector, helped sentiment. InterContinental also took the decision to sell much of its property, and run its hotels on a managed or franchise basis, while cutting less attractive properties. The disposals of 179 hotels helped the FTSE 100 stock return some £3.6 billion in special dividends and share buybacks to investors between 2004 and 2007.

Yet, despite the bid rumours sparked by the acquisition of a 10% stake by the Barclay brothers, InterContinental’s shares have swooned since the credit crunch set in last summer. A net debt position of £872 million is not an excessive burden, but the reduced availability of cheap debt could snuff out bid hopes. Worse, the ongoing economic slowdown seems almost certain to hit hoteliers around the globe, as business travellers and consumers alike tighten their belts.

A profit warning last week from DiamondRock (DRH:NYSE), got the hotel reporting season off to a bad start, as the small US operator lowered its revPAR (revenue per available room) guidance for this year. Results due today (31 January) from Starwood, Choice Hotels (CHH:NYSE) on 13 February and Marriott (MAR:NYSE) on 14 February could easily add to the bearish tone on the US hotels market, which generates around half of InterContinental’s sales and the bulk of its profits.

Any signs of further slippage in industry-wide revPAR could jeopardise consensus earnings growth forecasts of 14% for 2008, and mean the stock is nowhere near as cheap as it looks, despite the continued expansion and brand refreshment programmes.

Selling now has clear risks. A bid could still appear, while rate cuts in the US, and possibly the UK and even Europe, could extend the current broader market rally. Both would leave short sellers nursing nasty losses, so great care is needed. But any more dodgy numbers from industry peers should stop these shares in their tracks.

by: Russ Mould