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InterContinental Hotels Group

HLS Systems International

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Gene Marcial on Investing

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Welcome to InterContinental

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Hotel vacancies are up; hotel stocks are down. No surprise there. The weak global economy has cut travel spending, and average room rates have fallen. But Britain's InterContinental Hotels Group (IHG), whose global brands include Holiday Inn and Crowne Plaza, may be well positioned for this tight-purse climate. In fact, some analysts consider it the best play in the business.

"As travelers trade down to lower-priced accommodations, IHG's primarily midscale properties will benefit a lot," says Patrick Scholes of FBR Capital Markets, who rates the stock outperform. About 80% of the chain's rooms are in that price category.

IHG's stock has spiked up to 10.27 from a 52-week low of 5.98 on Mar. 9. Even so, it trades at a 30% to 50% discount to such peers as Starwood Hotels & Resorts (HOT) and Marriott International (MAR). Scholes sees IHG rising 30% more this year. The lodging companies, including IHG, are expected to post lower earnings in 2009, since revenue per guest is down. But despite challenging economic conditions, IHG's free cash flow remains robust: It's expected to hit $250 million in 2009, notes Scholes.

Andre Juillard of Natixis Securities in Paris remains positive on IHG. "We consider it to be the stock to play pending a future recovery in the U.S.," he says.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

—Gene Marcial

How China Stays on Track

Beijing's HLS Systems International (HOLI), which trades on the Nasdaq, gives investors a way to participate in China's rail and nuclear industries. Mark Tobin of Roth Capital Partners rates the stock a buy. It has raced to 5.10 on May 20, up from 2 last Nov. 25.

HLS develops and operates automation and control systems for China's railroads and nuclear installations. China has a minority stake in HLS, so the company receives government subsidies and tax incentives.

China's huge stimulus package for infrastructure is a boon to HLS, says Tobin, who sees it earning 53 cents a share in 2009 on sales of $163 million and 61 cents in 2010 on sales of $194 million.

Jason Schacht of Heartland Advisors, the biggest U.S. shareholder, with an 8.8% stake, says HLS is one of only five companies in China qualified to design and make rail and nuclear control systems.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

—Gene Marcial

Stocking Up at PriceSmart

PriceSmart (PSMT) owns and operates 25 discount warehouse clubs in Latin America, the Caribbean, and Asia—and it's thriving. "Consumers are attracted to the one-stop shopping, plus the savings from buying in bulk," says Michael Via of Frantzen Capital Management, a small-cap growth investor that owns Price- Smart shares.

Based in San Diego, PriceSmart has a business model similar to Costco (COST) and Sam's Club. Via points out that Price-Smart's sales are climbing at 20% a year. The underfollowed stock, however, is languishing amid the market malaise. It's trading at 16.17, down from 27 a year ago. And the price-earnings ratio of 10 is below its historical range of 12 to 15.

Columbine Capital Services, which rates Price-Smart a buy, figures it will earn $1.44 a share in 2009 on sales of $1.2 billion, up from $1.31 in 2008 on $1.1 billion.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.

—Gene Marcial