Turkey of the week: vulnerable hotelier

In 2009 the hotel industry was brought to its knees as firms slashed their budgets and consumer confidence plummeted. Recently, occupancy levels and revenue per available room (RevPar) have been improving. Hotel giant InterContinental saw revenues rise 3.1% in the first quarter of 2010, with RevPar up 5.2% in April, helped by growth in China and New York. But a double-dip could hammer this stock. Here's why.

Firstly, the chain is the world's biggest operator. It manages 650,000-odd rooms at nearly 4,500 branded locations (such as the Holiday Inn). So it will live and die according to the trading environment. The sudden change in RevPar is welcome, but visibility of bookings is still poor. If there is another slump, the group's operationally geared model means any weakness will be a major drag.

Room rates are also falling as hotels slash prices and offer deals to attract customers. But once prices are cut, it's hard to put them back up again. After hoteliers cut rates in the wake of the September 11th terrorist attacks, it took more than five years for many markets to recover. Plus there could be another decline in global tourism as hard-up consumers opt to holiday at home.

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Turkey of the week: InterContinental Hotels (LSE: IHG), rated a BUY in The Independent

The bulls point towards InterContintental Hotels' property-light model. It's sold most of its freehold sites over the past decade and now makes most of its profits from managing its hotels for third parties, or licensing its name to franchisees. This has cushioned it from the worst of the recession. But even so, this is a very cyclical industry. With credit availability tight, I suspect many of its leveraged investors will find it hard to refinance their debts, which could put the group's management contracts at risk.

Analysts expect 2010 sales and adjusted EPS of £1.1bn and 58.5p, with a 27.7p dividend (yield 2.6%). Even assuming a sustained recovery, it's still hard to justify the p/e ratio of 20. I'd value InterContintental Hotels on a throughcycle multiple of nine-times EBITA.

After adjusting for the net debt of $1.1bn, that gives an intrinsic worth of about 780p, or 30% less than today. First-half results are out on 10 August.

Recommendation: TAKE PROFITS at £10.63