Morgan Stanley Q3 Preview: Another Weak Quarter, but Move to Sidelines Ahead of Vaccine/Elections

NATIONAL REPORT—Morgan Stanley & Co. expects relatively weak third-quarter results and tempered commentary, but as a COVID vaccine and elections approach, the company’s strategists see potential for cyclicals to outperform. It still sees group business coming back during a later cycle, with structural headwinds from virtual.

Overall, Q3 U.S. RevPAR beat expectations, but companies are likely to report more in line to slightly below consensus. According to STR data, total U.S. RevPAR fell 48.5% in Q3 vs. Morgan Stanley’s prior forecast of a 53% decline. However, higher-end chain scales (luxury/upper upscale) and urban RevPAR all fell 72%, and these declines do not include closed hotels while the companies’ reports do. Morgan Stanley has cut its company RevPAR forecasts for all of its stocks except Extended Stay America, Inc. The firm is in line (within 2-3%) with consensus RevPAR for the C-Corps, but 6-10% below consensus for its covered REITs.

Morgan Stanley still forecasts U.S. RevPAR falling 47% in 2020 and not returning to peak (2019) levels until 2026, with the stronger Q3 being offset by a weaker Q4. It now expects 2021 RevPAR to be 25% below 2019 levels vs. 21% prior, but 2022 to be 13% below vs. 17% prior. Its expectation for a slower recovery is supported by recent U.S. RevPAR data, which shows that improving trends have stalled. September RevPAR fell 46% vs. August 47%, compared to the prior four months that had each seeing a 5-10% month-to-month improvement. U.S. RevPAR has now declined 48-52% for the past five weeks, which will likely limit management teams’ bullishness into their forward outlooks. However, the firm raised its 2022 forecast as it feels the exit rate in 2021 will likely be higher following the benefits of a vaccine.

Morgan Stanley expects Q3 earnings before interest, taxes, depreciation and amortization (EBITDA) to fall 83% year-over-year. It expects its covered lodging stocks’ Q3 EBITDA to fall from $2.5 billion to about $400 million, highlighting the pressure on the industry. It is below consensus EBITDA for the more asset-intensive DiamondRock Hospitality Company, Hyatt Hotels Corporation, Host Hotels & Resorts Inc., Sunstone Hotel Investors Inc. and Xenia Hotels & Resorts Inc., and above for the more asset-light Choice Hotels International Inc., Hilton Hotels Corporation, Marriott International Inc. and Extended Stay America Inc. 

The firm expects hotel owners to continue to experience pressure given stalling recovery trends, greater operating leverage and higher corporate and group mix. It believes investors should generally be more in line with its expectations following company disclosures in the quarter and the STR RevPAR results. European Accor and IHG reported weak Q3 results on Oct. 23. A key focus for its C-Corps will be unit growth outlooks, and if anything has changed from prior earnings when the companies suggested growth of about half of pre-COVID levels. Accor on its Q3 earnings guided to 2-3% growth (vs. a pre-COVID target of 5%), while IHG saw Q3 signings halving, and Morgan Stanley expects net unit growth of only 0-1% in full-year 2020 vs. 4% in 2019, but this is partially a function of one large lost contract.