Morgan Stanley, a global investment bank, is betting that the US hotel industry is set for a strong third-quarter earnings season. In a research note, the bank highlighted that US revenue per available room (RevPAR) — a key industry metric that measures how much money hotels earn per room, whether occupied or not — grew 7.1% in the third quarter. That's a notable acceleration from the roughly 5.6% growth seen in the second quarter, and it suggests that demand for hotel rooms remains robust despite broader economic uncertainty.
On the back of that strength, Morgan Stanley raised its price targets for four of the biggest US hotel operators: Marriott International, Hilton Worldwide, Hyatt Hotels, and Wyndham Hotels & Resorts. The new targets are $403 for Marriott, $349 for Hilton, $224 for Hyatt, and $97 for Wyndham. Price targets are Wall Street analysts' estimates of what a stock could be worth in the next 12 months or so, and an increase typically signals that the analyst sees more upside ahead.
Why RevPAR matters
RevPAR is the hotel industry's go-to gauge of health because it combines two critical factors: occupancy (how full the hotel is) and average daily rate (how much guests pay per room). When RevPAR rises, it usually means hotels are filling more rooms, charging higher prices, or both. For investors, strong RevPAR growth is a leading indicator that hotel companies will report solid earnings, since more revenue at the property level typically flows to the bottom line.
Morgan Stanley's data shows that luxury properties are leading the charge, with higher-end hotels enjoying particularly strong demand. That's a positive sign for the broader travel sector, as it suggests consumers are still willing to spend on discretionary travel even as inflation and interest rates remain elevated.
The asset-light model
One of the key reasons Morgan Stanley's optimism matters is how the big hotel chains actually make money. Unlike traditional hotel owners, Marriott, Hilton, Hyatt, and Wyndham operate what's known as an "asset-light" model. That means they don't own most of the hotels that carry their brands. Instead, they franchise their names and manage properties owned by other investors, collecting fees for their services.
This model has several advantages. It requires less capital, generates steady recurring revenue, and is less exposed to the ups and downs of property values. But it also means that when RevPAR rises at the property level, the chains' fee income — which is often tied to a percentage of room revenue — rises too. So the 7.1% RevPAR growth is directly relevant to the earnings of these companies.
Morgan Stanley's view is that this momentum could lead to positive earnings surprises when the hotel chains report their third-quarter results. In Wall Street parlance, an "upside surprise" means a company beats the earnings expectations that analysts had set. If that happens, it could give a boost to the stocks, which have been under pressure in recent months as investors worried about a potential slowdown in consumer spending.
What it means for investors
For everyday investors, this news is a signal that the travel and hospitality sector may be more resilient than some feared. If you own shares in any of these hotel companies — or in a mutual fund or exchange-traded fund (ETF) that holds them — the raised price targets suggest that analysts see room for the stocks to climb from current levels.
However, it's important to remember that price targets are just one analyst's opinion, and they can be wrong. The hotel industry is cyclical, meaning it tends to rise and fall with the broader economy. If the US slips into a recession, or if consumers start cutting back on travel, RevPAR growth could quickly reverse. Also, the third-quarter earnings reports, which are due in the coming weeks, will be the real test. If the companies miss expectations despite the strong RevPAR data, the stocks could fall.
Investors should also keep an eye on the broader market context. The hotel sector is sensitive to interest rates, as higher rates can make it more expensive for hotel owners to finance properties, and they can also weigh on consumer confidence. But for now, Morgan Stanley's analysis suggests that the tailwinds from strong demand and pricing power are outweighing those headwinds.
In other earnings news this week, NextEra beat profit estimates thanks to its renewables unit, while Intuitive Surgical trimmed its growth outlook and saw shares dip. These mixed signals highlight the uneven nature of the current earnings season.
The bottom line
Morgan Stanley's bullish stance on US hotels is a clear vote of confidence in the sector's near-term prospects. The 7.1% RevPAR growth is a strong number, and the raised price targets for Marriott, Hilton, Hyatt, and Wyndham reflect that optimism. But as always, investors should do their own research and consider their own financial situation before making any decisions. The hotel industry can be volatile, and past performance is not a guarantee of future results.
For now, the message from Morgan Stanley is simple: the US hotel industry is setting up for a strong third quarter, and that could translate into better-than-expected earnings for the major chains. Whether that will be enough to lift the stocks remains to be seen, but it's a positive sign for investors who are watching the travel sector.
