Investors who sold in May, went away and are only coming back after St Leger’s Day have missed a summer of elevated stock market volatility. Indeed, while the FTSE 100 index is little changed versus its level in May, the four months that have preceded this weekend’s St Leger horse racing festival have proved to be anything but a smooth ride for investors.
While Questor would be unsurprised if recent stock market volatility persists in the short run – given that the full impact of previous interest rate rises on economic data is only now being felt following time lags – this column remains wholly unconcerned about the prospect of highly changeable share prices.
After all, they do not bear any relation to the quality or long-term prospects of individual companies. Rather, they simply provide a snapshot of how investors are feeling at a specific time on a particular day.
As a result, we will push ahead with our ongoing plan to increase the equity exposure of our wealth preserver portfolio. The latest addition is InterContinental Hotels Group (IHG). It is a longtime favourite of Questor and has gained 80pc since first being tipped in March 2020, thereby outperforming the FTSE 100 by 81 percentage points. However, it has not featured in our wealth preserver portfolio until now.
The firm’s latest half-year results showed that it is making solid overall progress. Having experienced a disappointing performance in the Americas during the first quarter of the year, due in part to the timing of Easter, its revenue per available room in the region rebounded in the second quarter. On a global basis, it was up by 3pc in the first half of the year as average daily room rates rose by 2pc and room occupancy increased by 0.6 percentage points.
Earnings during the six-month period rose by 12pc on a per-share basis, with the firm’s $800m (£612m) share buyback programme having a positive influence and now being almost 50pc complete. Profits were also boosted by a 1.8 percentage point rise in the company’s fee margin as it included new revenue from the sale of loyalty points.
A 23pc rise in the firm’s net debt during the first half of the year, meanwhile, should not be viewed as a cause for concern. Net interest payments were covered 10 times by operating profits in the six-month period, while upcoming interest rate cuts should gradually reduce the cost of debt over the coming years.
Monetary policy easing is also set to have a positive impact on IHG’s operating environment. It should encourage greater spending among consumers, thereby providing a welcome boost for the hotel industry after a challenging period over recent years. This should act as a positive catalyst on the company’s financial performance and share price once time lags have passed.
And while the firm’s cyclical status means its share price is likely to be more volatile than that of a typical FTSE 100 company, Questor believes this is more than fully offset by its significant long-term capital growth potential.
An increase in the firm’s total number of rooms should act as a further catalyst on its financial performance. It currently has a pipeline of 330,000 rooms that equates to around 35pc of its global estate of 955,000 rooms. Given the geographic breadth of its locations, as well as its wide range of price points, it is well placed to capitalise on an improving global hotel industry outlook.
Its diverse portfolio also brings risk reduction benefits that further enhance the stock’s risk/reward opportunity.
Following its significant share price gain since our original tip more than four years ago, IHG’s shares now trade on a relatively rich price-to-earnings ratio of 27. While this means there may be more limited scope for an upward rerating vis-à-vis other FTSE 100 stocks that trade on much lower valuations, the company’s improving financial performance is set to drive further capital gains.
Having removed several holdings from the wealth preserver portfolio over recent months, we will use excess cash to fund the stock’s notional purchase. Its excellent market position, sound growth strategy and improving industry outlook amid interest rate cuts mean that further capital gains and FTSE 100 index outperformance lie ahead.
Questor says: buy
Ticker: IHG
Share price: 7,746p
Read the latest Questor column on telegraph.co.uk every Sunday, Monday, Tuesday, Wednesday and Thursday from 8pm
Read Questor’s rules of investment before you follow our tips
Disclaimer: The copyright of this article belongs to the original author. Reposting this article is solely for the purpose of information dissemination and does not constitute any investment advice. If there is any infringement, please contact us immediately. We will make corrections or deletions as necessary. Thank you.
