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The stock market’s increasingly uncertain outlook could tempt some investors to take profits on their holdings.
They may feel that, with geopolitical risks being elevated and the impact of interest rate rises yet to be fully felt, now is the time to bank gains on profitable holdings. Indeed, the FTSE 100 has fallen by 5pc in the past two weeks. In such circumstances, cash savings can suddenly appear highly attractive.
In Questor’s view, however, investors should not only stick with high-quality shares such as InterContinental Hotels Group during the current stock market slump but buy more of them if they have capital available.
After all, the company has an excellent competitive position, is delivering strong financial performance and has stunning long-term growth potential. Its third-quarter trading update, out last month, showed encouraging progress.
Revenue per available room rose by 10.5pc relative to the same period of the previous year, while China’s growth rate of 43pc stood out. It’s true that such strong growth in China benefited from the comparison with weak performance in the third quarter of the previous year, which was held back by the country’s now-abandoned zero-Covid policy.
However, China’s economy is forecast by the OECD to expand by 5.1pc this year and 4.6pc next year, so it offers significant growth potential for travel and leisure stocks. And with roughly a third of IHG’s pipeline of rooms being located in China, it is well placed to capitalise on the country’s improving post-Covid outlook.
Its latest quarterly update also showed that, on a global basis, revenue per available room was almost 13pc higher than pre-pandemic levels. This was the fifth successive quarter in which performance was ahead of 2019 levels, with price increases more than offsetting a one percentage point reduction in occupancy rates.
Future occupancy levels should benefit from a forecast decline in American interest rates over the next two years. This should directly benefit IHG, since more than 50pc of its rooms are located in the Americas.
In the meantime, its generation of profits equal to 37 times its net interest costs in the first half of the current year shows its ability to overcome any short-term economic difficulties.
Its capacity to deal with economic undulations is further enhanced by an “asset-light” business model that provides additional flexibility, while it does not require large capital expenditure to grow.
This enhances its free cash flow, which allows it to return significant sums to investors by paying dividends or repurchasing its own shares. In the current year, for example, IHG expects to return $1bn (£824m) to investors to reduce the number of its shares in issue by nearly 6pc.
In terms of growth potential, the company’s pipeline currently stands at 292,000 rooms. Once in operation, they will increase its room numbers by 31pc from current levels.
Its mixture of mid-market and luxury brands, alongside a broad geographic spread, enables it to offer significantly greater diversity, and therefore less risk, than other London-listed hotel groups.
It also has a competitive advantage from its 115m loyalty programme members, who accounted for more than half of its bookings in the most recent financial year.
Alongside an ongoing investment in technology, such as its recently launched mobile app, this has prompted growth in the proportion of direct bookings, which reduces reliance on less profitable third-party travel websites.
The stock’s valuation does remain high. It currently trades at 24.9 times earnings, which may put off some investors.
However, IHG has consistently traded on a relatively rich valuation over recent years. And since it is forecast to grow earnings per share by 30pc this year and 11pc next year, it continues to offer good value for money compared with the wider FTSE 100.
Having outperformed the index by 23 percentage points, and risen by 36pc, since we first tipped the stock in March 2020, some investors may be tempted to bank their gains amid current economic and stock market turbulence.
In Questor’s view, though, the stock offers further capital growth potential. It has a solid financial position, a clear competitive advantage and attractive long-term growth prospects as major economies such as China and America deliver on their potential. Keep buying.
Questor says: buy
Ticker: IHG
Share price at close: £58.10
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