Investing.com -- Q4 was a volatile quarter for the hotel industry.

Shares of Marriott International Inc (NASDAQ:MAR) and Hyatt Hotels (NYSE:H) saw a downturn following their guidance updates for the fourth quarter of 2024, which indicated misses to their 2023 corporate management development (CMD) guidance.

InterContinental Hotels Group PLC ADR (NYSE:IHG) did not provide profit guidance, focusing instead on higher-than-expected capital expenditures (capex) and interest, resulting in a 5-10% decrease in their stock prices.

In contrast, Hilton's (NYSE:HLT) guidance was more aligned with market expectations, yet its full-year 2024 net unit growth (NUG) still fell short of the guidance set at the beginning of the year.

After analyzing the recent performance of these global hotel giants, Bernstein noted a trend of increasing capital intensity in their business operations. This trend, marked by rising capex and mergers and acquisitions (M&A) activity, has led to slower organic NUG and fee revenue growth compared to past achievements.

Still, the firm’s analysts maintain a positive outlook on the asset-light business model employed by these companies, adding that the current noise represents “good entry points” for investors.

A major point of concern raised during the Q4 results was the concept of Key Money, which is a payment made by a hotel brand to a property owner to secure a management contract. This payment, typically around 5% of a hotel's construction cost, has been on the rise, contributing to the increased capex reported by the companies.

Marriott, for example, has seen a rise in Key Money in lower chain scale hotels and has set its capex above CMD targets. Moreover, Hyatt has made investments to enhance management agreement terms, and IHG has increased its Key Money guidance by $50 million.

“We would note that any jump in Key Money is not short term but would have been agreed on signing the relevant contract, 3-5 years ago and so is hard to put down to short term cyclical pressures,” analysts led by Richard J. Clarke explained.

They believe the spike is a strategic move, reflecting a focus on luxury, loyalty programs, and conversions. The analysts think that this trend is likely to decrease as a growth contributor once capital rebuilds.

Despite the near-term challenges, Bernstein argues that the global hotels’ business model remains robust, with capex still reasonable when adjusted for system growth and inflation. They also note that slower NUG appears to be cyclical, influenced by a more challenging development environment.

“The most compelling sign that the business model continues to chug along as usual is the continued strength in capital returns,” analysts said.

Excluding M&A expenditures from IHG and Hyatt, cash returns are consistent with expectations and continue to grow year-over-year.

Overall, Bernstein maintains a positive outlook for the sector, expecting mid-teens earnings per share (EPS) growth from all companies involved and expressing a preference for Marriott and Hyatt, which are currently trading at a discount compared to Hilton and IHG.

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