In 1995, 18.9 million international tourists visited Africa. In 2010, nearly 49.4 million did.

They were lured by the continents natural and cultural wonders and emboldened by an increasingly stable political environment. Now, rapidly improving infrastructure is making it easier than ever to visit the continent.

The United Nations estimates tourist arrivals will grow to 77 million by 2020. And that doesnt count domestic tourism, which accounts for roughly three quarters of tourism in South Africa.

Hotels obviously stand to benefit from this trend.

Ive ranked nine of Africas largest hotel stocks on the basis of growth, profitability, leverage, value, and risk. My thinking is that if we put it all together, well get a reasonably accurate ranking of which stocks offer the biggest bargain.

Photo by BA_Banks

If youre going to invest in hotels, youll be looking for a company that knows how to be hospitable to more and more weary travelers with every passing year. Hoteliers should be adding facilities, adding rooms, keeping those rooms occupied, and charging as much for them as possible. The easiest way to gauge a companys effectiveness at this is by looking at revenue growth.

The chart below shows the long-term revenue growth of sub-Saharan Africas nine most prominent hotel stocks. Ive given each of them a score by dividing the range between the fastest grower and the slowest one into deciles. I award companies in the highest decile 10 points. Those in the lowest receive just one.

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2. Profitability

Revenue growth is pretty meaningless if a company cant keep expenses under control. Plush towels, concierges, and spas dont come cheap! So, when evaluating hotel stocks, the net profit margin is a hugely important metric. The fatter a companys margin is, the more money it will have to expand its operations, and the longer it will make money for its shareholders.

Heres how Africas hoteliers ranked:

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3. Leverage

Next, we introduce a risk metric to our analysis. The Debt/Equity ratio simply measures the relative percentage of debt a company maintains on its balance sheet.

The lower the ratio the less dependent the company is on external financing. A lower ratio implies that a company has more options available to it when it figures out how to finance new hotels or renovations. Conversely, a high ratio may mean a firm is over-extended.

Take a look at the following table to see which companies balance sheets are still showing the vacancy sign.

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All of the above performance metrics mean very little if the share is already priced for perfection. So, if were going to rank the best stocks in the industry, we need to introduce an element of value to the equation.

Ive used the humble price/earnings ratio here. Its far from perfect, but its quick and convenient, and, I believe, adequate for this initial stage of analysis.

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5. Dividend Yield

I always like to include dividends in my analysis because they are tangible evidence of a companys ability and willingness to reward its shareholders. Its also an important value metric the lower the share price, the higher a stocks yield.

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6. Country Risk

Finally, because we are comparing stocks from a number of different markets, we need a method of ranking the relative macroeconomic risk involved in investing in each country. My shortcut method for this is to simply use sovereign credit ratings.

Standard and Poors rates more African countries than does Fitch or Moodys, so their rating is my default. I used Moodys rating for Mauritius because neither of the other two agencies rates it.

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Victory is Suite

Now, lets put all of the above scores together to see which hoteliers look like 5-star stocks.

9. Lux Island Resorts   Formerly known as Naiade Resorts, Lux has ambitious expansion plans. It hopes to secure management contracts at hotels in the Persian Gulf, Africa, and even Haiti. Unfortunately, with its narrow profit margins, it doesnt get much bang for its growth buck. Combine this with a rich valuation and no dividend, and were looking at the least attractive stock of the bunch. (avg daily trade volume: $14,520 )

8. Capital Hotels   Capital owns only one facility the Sheraton Abuja Hotel. The company is relatively profitable, but its only growing as quickly as the one facility allows. That would be easier to swallow if the company paid out a decent dividend, but the yield doesnt come close to the top tier, and Nigerias relative risk sealed the stocks fate near the bottom of the attractiveness ranking. (avg daily trade volume: $8 )

7. Gooderson Leisure   Gooderson operates eight resort and hotel facilities in eastern and northern South Africa. It hasnt grown very quickly in the past five years, so its got a relatively clean balance sheet. Its thin margin keeps it near the bottom of the ranking. (avg daily trade volume: $1,516 )

6. Sun Resorts   With four hotels in Mauritius and one in the Maldives, Sun ranks as one of the Indian Oceans largest hoteliers. Historically, they have lived and died on tourists from France, but with European economies under threat, the company is turning its attention to Asia. If it can boost occupancy rates, the stock may climb into the top half of the rankings. It already sports an intriguing earnings multiple. (avg daily trade volume: $10,992 )

5. New Mauritius Hotels   With its dependence on European tourists, NMH faces many of the same challenges as Sun. In fact, it delayed a dividend announcement due to Eurozone uncertainty. Still, the company has a healthy margin, and lots of room for leverage on its balance sheet. Look for a fast turnaround if Euro fears subside. (avg daily trade volume: $68,419 )

4. City Lodge Hotels   South Africa-based City Lodge expanded with gusto in the lead-up to the 2010 World Cup. It opened eight hotels between 2009 and 2010, giving it a total of 52 South African locations. The strategy paid off. Profit margins are among the highest of any African hotelier, but with a debt/equity ratio of 3.87, the company likely doesnt have much appetite for more expansion in the near-term. (avg daily trade volume: $365,213 )

3. TPS Eastern Africa   The company behind the Serena brand, TPSEA operates a chain of 32 resorts and lodges across Eastern Africa and South Asia. Its got lots of room for leverage on its balance sheet and trades at a cheap earnings multiple. The only real area in which it suffers versus its peers is its location relatively risky Kenya. (avg daily trade volume: $17,700 )

2. Cresta Marakanelo Established in 1987, Cresta runs eight hotels in Botswana. Its grown rapidly over the years, expanding from 100 rooms to more than 800. It boasts a solid 4.2% dividend yield, but Id like to see them eke out a few more pulas per available room. Their net margin is just 5.7%. (avg daily trade volume: $699 )

And the Winner is

1. Chobe Holdings With its collection of safari camps near the incredible Okavango Delta, Chobe Holdings offers guests a once-in-a-lifetime experience. Thus, it can get away with charging them a premium. This shows in the 15% net margin that it posted over the past 12 months. Theres not much to dislike about the stock. Revenue is growing apace. Theres little debt on the balance sheet. It pays an attractive dividend. And its based in steady-as-she-goes Botswana. The only downside is that the stock is as illiquid as the Kalahari desert. Even retail investors could find it difficult to build a meaningful position in the stock. (avg daily trade volume: $48 )