Analyzing the Hotel Industry’s Valuation



EV/EBITDA multiple

To value capital-intensive companies like hotels, we use the EV/EBITDA multiple. It is EV (enterprise value) divided by EBITDA (earnings before interest, tax, depreciation, and amortization). The EV/EBITDA multiple helps remove some drawbacks of the PE (price-to-earnings) multiple. Unlike the PE ratio, the EV/EBITDA multiple takes into account both the shareholder and debt perspectives.

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Trend analysis

The forward EV/EBITDA multiple for the hotel industry currently stands at 10.86. This is slightly lower than the 11.4x forward EV/EBITDA multiple seen at the start of the year. However, this is a decline from the 13x forward EV/EBITDA multiple seen at the end of 2014.

One of the reasons for the decline might be the decreasing RevPAR growth of the hotel industry. RevPAR is a performance metric used in the hotel industry. It is calculated as room revenue divided by the rooms available. It can also be calculated as occupancy multiplied by average daily rate (or ADR). The industry saw an ADR of ~10% in 2014, which decreased to 8% at the start of 2015. ADR decreased to a mere 2.2% in August 2015.

Another reason for the decline might be the falling ADR growth rate, which has decreased from 4.4% at the end of 2014 to 3.6% in August 2015. ADR is calculated as room revenue divided by rooms sold.

Occupancy has increased from 53% at the end of 2014 to 71% in August 2015. Occupancy is the percentage of available rooms that were rented out or sold during a specified period of time.

Investors can gain exposure to hotel stocks by investing in the Consumer Discretionary SPDR ETF (XLY), which holds 0.63% in Marriott International (MAR), 0.52% in Starwood Hotels (HOT), and 0.38% in Wyndham Worldwide (WYN). Other major hotel stocks include Hilton Worldwide (HLT) and Hyatt Hotels (H).


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