Why hotel stocks surged this week

What happened

Stocks of hotel stocks had a great week this week as economic and inflationary news played into the industry’s strengths. High capital expenditure businesses like hotels could be among the few beneficiaries of higher inflation, and so investors have been bidding on the industry.

According to data provided by S&P Global Market Intelligence, shares of Park Hotels and Resorts (NYSE: PK) increased by 12.1% this week, DiamondRock Hospitality (NYSE: HRD) increased by 11.7%, and Hyatt Hotels (NYSE:H) jumped 10.7%.

Image source: Getty Images.

So what

The biggest news of the week was the 8.5% jump in consumer prices in March from a year ago. Higher food, energy and housing costs have been driving inflation, although some energy costs may already be falling.

Despite high inflation, the economy appears to be buzzing, unemployment at just 2.7% nationally and wages steadily rising. What’s helpful for hotel businesses is that they can increase prices as the costs of other goods increase, but they won’t see the same proportional increase in costs, which will help margins and the bottom line. . In a capital-intensive business like the hotel industry, inflation is actually a good thing as long as hotels stay full.

The only downside is that the Federal Reserve now looks likely to raise interest rates relatively quickly to contain inflation, which will increase borrowing costs for businesses. But for existing operators, it can also help control new supply just as room rates start to rise.

Park Hotels & Resorts said occupancy for March 2022 was 63%, down from 53% in February 2022. The company also said it would accelerate plans to open a hotel in San Francisco. Management called it a “widespread recovery” for the company, which seems to suggest that demand has remained strong despite high inflation in the US economy.

Now what

The hospitality industry has been difficult for the past two years, but there seems to be light at the end of the tunnel for operators. This is great news for investors, and demand seems to be coming back as the price of everything rises. This could be a double tailwind for the hospitality industry in 2022 and beyond.

One caveat I will point out is the potential for a recession if inflation continues and the Federal Reserve raises interest rates quickly. It doesn’t seem like a huge risk to the business today, but it’s worth keeping an eye on. That said, it looks like hotels will be among the biggest beneficiaries of the current high inflation and strong economy for as long as it lasts.

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Travis Hoium has no position in the stocks mentioned. The Motley Fool recommends Hyatt hotels. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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