Once we bid adieu to SARS, say hello to big fat profits!

As long as the media continue to fuel the fear of SARS, the havoc in the travel sector will continue. But once SARS is replaced by the next big story on the media agenda, it should be possible for us to pull in profits from those travel plays stuck at the bottom. These days, we are particularly interested in the hospitality sector, which has been rocked by SARS fears, geopolitical uncertainty, and homeland security issues.

When insiders lay out cash for their own stock, it’s a bullish sign. So when we came across Prime Hospitality Corporation (PDQ:NYSE), we knew we had a future winner on our hands. With SARS and the war wreaking havoc on the travel industry, many companies like PDQ bottomed out and became screaming buys. It doesn’t hurt that the CEO just increased his holdings in PDQ to 4.8 million shares, buying 450,000 shares on April 11 at US$5.30 per share. You don’t put out that kind of cash for a play going belly up in the muck pond.

To bring you up to date, PDQ owns, franchises, and manages hotels, with 31,426 rooms in 245 hotels located in 33 states. The company controls AmeriSuites, Wellesley Inns & Suites, and Prime Hotels and Resorts, in addition to other full-service hotels under franchise agreements with national hotel chains.

It runs and has ownership interests in about 126 hotels, operates 28 under lease agreements, and manages 45 for third parties. As of now, its portfolio includes 149 AmeriSuites, 73 Wellesley Inns & Suites hotels, one property by Prime Hotels and Resorts, and 22 non-proprietary brand hotels.

What’s nice about this play is that once summer travel season picks up, vacation time gets taken, school is out for the summer, and SARS and Iraq get bumped from the media hot list, this play could fly. Right now, it’s not doing great. But that’s because of the reasons already mentioned.

Good time to buy

For Q1, PDQ posted a net loss of US$6.6 million or 15 cents per share, compared to net income of US$0.8 million or two cents per share in Q2 2002. Total revenues fell by US$8.2 million to US$90 million because of lower sales and the impact of asset divestitures. Revenue per available room was down 7.1% compared to Q1 2002. This decrease is blamed on lower average daily room rates. For Q1 2003, this rate actually dropped by 7.9% to US$66.93. The announcement should rid the play of weak hands, allowing us to go bottom fishing and catch this guppy on the rise.

Like we said, we do expect to see improvement in the travel sector. Once SARS loses attention, schools shut down for the summer, employees take much-needed vacations, and new retirees hit the highways, hospitality plays such as PDQ could rise nicely and load your pockets with green.

PDQ:NYSE is a speculative buy recommendation under US$7 per share. Contact: 700 Route 46 East, Fairfield, NJ 07004, tel. 973-882-1010, fax 973-882-7691. Visit www.primehospitality.com.