To value capital-intensive companies like hotels, we use the EV-to-EBITDA multiple, which is EV (enterprise value) divided by EBITDA (earnings before interest, tax, depreciation, and amortization).
The EV-to-EBITDA multiple helps remove some drawbacks of the PE (price-to-earnings) multiple. Unlike the PE ratio, the EV-to-EBITDA multiple takes into account both the shareholder and debt perspectives.
Hotel industry EV-to-EBITDA
The forward EV-to-EBITDA multiple for the hotel industry currently stands at 9. It has declined from 13.1, which was recorded at the beginning of 2015. The valuation multiples depend on the risk perception by the investors and growth prospects in the industry.
Some of the reasons for the decline in the valuation multiple include lower-than-expected ADRs (average daily rate) and occupancy rates recorded in the second half of 2015. Recent corrections in 2016 outlook for ADR and occupancy rates have also driven valuation multiples lower. Although the majority of the economic indicators are moving positively in the domestic market, the global uncertainty triggered by a slowing China still remains a concern for the hotel stock prices.
Investors can gain exposure to the hotel sector by investing in the First Trust US IPO Index ETF (FPX), which invests ~6% of its portfolio in the hotel sector.