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InterContinental Hotels Group (LSE: IHG) has lost a quarter of its value in just four months. However, the FTSE 100 stock is still up more than 100% over five years, even after the sharp pullback from 10,880p to 8,240p since February.
Here’s why I think it’s just a matter of time before the stock gets back to winning ways.
Attractive business model
IHG, as it’s known, is one of the world’s biggest hotel companies, operating across more than 100 countries. The group’s brands span budget (Holiday Inn) to luxury (InterContinental, Kimpton, and Regent), but it has a very strong mid-market presence.
What’s important to understand is that IHG doesn’t typically own the hotels outright. Instead, it earns revenue through franchise fees, which are based on a percentage of room revenues. Or management fees for running hotels on behalf of owners.
It also generates value from its IHG One Rewards loyalty programme, which has over 145m members. Many hotels pay IHG a fee to be part of this loyalty scheme.
This asset-light, recurring revenue model means the company is very profitable. Last year, the operating margin was a healthy 21%.
Economic uncertainty
In Q1, IHG opened 14,600 rooms across 86 hotels, more than double in the same period last year. Global revenue per available room (RevPAR) grew 3.3%, with strong performance in the Americas (+3.5%) and Europe, Middle East, Asia, and Africa (+5%).
However, the firm’s fortunes are obviously still closely tied to ongoing travel demand. In China, Q1 RevPAR fell 3.5%, with occupancy at 52.8% versus 63.4% for the US and 66.7% for Europe, Middle East, Asia, and Africa. Global occupancy growth was pretty anaemic, at just 0.6%.
Meanwhile, tariff uncertainty has led to fears of a US recession. International travel to America has slowed recently. The US is IHG’s most important market, so this is arguably the biggest risk here.
A slowdown could impact near-term growth, while any escalation in the Israel-Iran conflict might put people off travelling to the Middle East at all.
Another issue worth highlighting is IHG’s decision to launch a hefty $900m share buyback programme in February. With the stock trading near record highs at the time, some investors questioned whether the cash would have been better spent reducing the group’s $2.7bn net debt position.
Very supportive trends
While the rest of the year looks uncertain, I’m bullish on IHG’s long-term prospects. It currently has a global pipeline of 334,000 rooms in 2,265 hotels, with emerging markets like India, Southeast Asia, and Africa offering massive expansion potential.
We may be living in a world of Airbnb and hostel-dwelling digital nomads, but branded hotels still rule the roost in business travel, groups, and loyalty programmes. And anything involving a decent breakfast!
According to Airports Council International (ACI), global passenger traffic is projected to nearly double by 2053, reaching 22.3bn. This will be driven by a rising middle class in emerging markets and increasing demand for air travel. A wide selection of IHG’s hotels will be waiting for them across the globe.
After its 25% haircut, the stock is trading at around 20 times forecast earnings for 2026. At this valuation, I think it’s well worth considering as a long-term addition to a diversified portfolio.
