Holiday Inn-owner InterContinental Hotels (IHG) has reported a solid set of full-year results with gains in profit, revenue, free cash flow and a generous hike in the dividend. So why have the shares dropped 2.2% to £19.45 on such a strong set of numbers?

The answer is simple. This is a classic case of a company which has rallied ahead of an event and publication of the numbers is the trigger for investors to take profits.

It happens time and time again, explaining the popular phrase: 'It is better to travel than arrive'. The decision individuals must take is whether to 'trade' stocks around news events or 'invest' with the understanding that there could be bumps along the way.

Stocks that run up ahead of news such as financial results will need a catalyst on the actual event in order to maintain the rally. A good example of a positive catalyst is an upgraded earnings forecast or share price rating from one or more analysts. Stocks that don't receive such a catalyst are vulnerable to losing their momentum, particularly those on high share price ratings.

IHG - Comparison Line Chart (Actual Values) Prior to today's results, the hotelier's shares had risen 30% since November 2012, helped by analysts nudging up their earnings forecasts and positive comments from rivals on the health of the industry.

Indeed, trading has been good with notable gains in the US and emerging markets. For 2012, InterContinental has reported a 10% rise in operating profit to $614 million on sales of $1.8 billion. On the back of free cash flow rising 9.7% to $463 million and $8 million cash proceeds from disposals, the hotelier has raised its dividend by 16% to 64c for the year.

But with the shares having rallied so hard (for a FTSE 100 stock) in the past few months, analysts were always going to use the results as the trigger to reassess their stance on the £5.2 billion cap. At the time of writing, analysts were reviewing their earnings forecasts on InterContinental Hotels but several have already tweaked their share price ratings.

Investec nudges its share price target up 3% to £20 but this leaves total shareholder return below 10% upside so its rating moves from 'buy' to 'hold', as per the stockbroker's rating methodology. Numis raises its share price target price from £18 to £20 but again this doesn't provide enough share price upside to keep the previous 'add' rating so it switches to 'hold'.

Numis' ratings formula requires 20% minimum upside to be a 'buy'; 10% to 19.99% upside for 'add'; 0% to 9.9% upside for 'hold'; 10% to 19.9% downside for 'reduce'; and 20% or more downside for 'sell'.

Existing shareholders with a long-term horizon will probably ignore these 'technical' downgrades as there isn't bad news in the results with which to cause worry. Indeed, Liberum Capital remains bullish, reiterating its 'buy' rating based on high return-on-invested-capital, strong free cash flow, market leading brands and emerging market exposure.

A future catalyst eyed by the market is news of asset sales. This wasn't expected in today's results, but investors should certainly get some update in the near future. The hotelier has expressed a desire to sell assets. Liberum published a research note in November 2012 where it suggested that InterContinental Hotels could sell four big hotels for $1.76 billion by the end of 2013 and use the bulk of the proceeds to buy back shares.


(Picture credit: Vismedia)

Issue Date: 19 Feb 2013