Three quality hospitality stocks for 2021

It’s a good time to invest in these companies, argues one City expert. Here’s why.

Positioning for a recovery in the hospitality sector, once Covid-19 restrictions start to ease in 2021, has prompted a City bank to upgrade its price targets on Whitbread (LSE:WTB), IHG (LSE:IHG) and Compass (LSE:CPG).

The cautious optimism of analysts at Deutsche Bank reflects the beneficial impact of vaccine discoveries on the economic cycle, even though hotel stocks have now rallied by 44% on average. The big three in the catering sector are up 47% since 9 November.

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Tighter pandemic restrictions in London and across Europe threaten to disrupt the progress in the short-term, however, with Deutsche not seeing pre-crisis levels of activity until 2023/24. That uncertainty is why the bank is opting for quality in the hotels sector after naming mid-scale operators Whitbread and IHG as its preferred picks.

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One reason for liking Whitbread is because its demand mix is skewed to the regions, with about 80% of its capacity outside London. Brexit uncertainty shouldn't have too many consequences and the impact of Covid-19 is likely to mean another summer of staycation activity.

There's the added appeal that Whitbread has shored up its balance sheet through a £1 billion rights issue at the start of the crisis, with its asset-heavy operating structure offering higher leverage opportunities during the recovery phase.

Deutsche this week increased its target price from 3,500p to 3,800p, which compares with 3,109p today and the low of 1,808p seen in March. The shares were trading at more than 4,000p prior to the pandemic sell-off.

Research analyst Andre Juillard said:

“Considering that the worst of the crisis is probably behind us, we believe that this is a good time to invest in the stock.”

IHG has been the year's best performing stock in the European hotels sector due to its exposure to the US and China, which have been the most resilient markets thanks to having a larger percentage of domestic clientele. Its mid-scale positioning, with well-recognised brands such as Holiday Inn and Express, is also more resilient than upscale or luxury.

These factors have helped to keep its valuation closer to US peers, with Deutsche also confident that IHG will recover faster than European counterparts.

Juillard believes that IHG shares are trading closer to the level they should be at, but on the back of the potential for earnings upgrades he has lifted his target price to 5,600p. Today, shares were trading at 4,657p in the FTSE 100 index.

The situation is slightly different for stocks in the contract catering sector as some are already seeing near pre-crisis levels of activity in education and healthcare. The recovery will take longer in business and industry, however, given the continued work-from-home trends.

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Deutsche has ‘buy’ recommendations on Compass, Sodexo (EURONEXT:SW) and Elior (EURONEXT:ELIOR), with the price target on London-listed Compass increased from 1,575p to 1,645p in this week's note due to the market share benefits and margin gains available for a company of its scale.

In fact, the bank favours Compass over Sodexo thanks to its exposure to sport and leisure and the white-collar population and lower exposure to facilities management. A powerful position in the United States should also enable it to return to even stronger growth.

Juillard added:

“We confirm our trust in Compass's ability to not only deliver strong results but also surpass 2019 results in 2023.”

Compass was one of the first to tap shareholders at the start of the crisis, with the £2 billion raised allowing it to look to the future with confidence and leverage opportunities as they arise.