worldlyinvestor.com Sector of the Day
By Glenn S. Curtis, Columnist
Thursday July 6, 2:39 pm Eastern Time
The company just reported strong earnings, but the macroeconomic picture isn't too inviting.
The strong earnings Marriott International (NYSE:MAR) reported Monday are just another sign of how well this hospitality
giant is doing building a strong business that should perform well into the future.
Whether to purchase stock in such a company now, however, as borrowing costs have risen and the economy starts
to slow, is an entirely different question. My answer: while Marriott is probably a great long-term play, in the
near term the risks could outweigh the rewards.
Marriott said Monday it earned 50 cents per share on $2.4 billion in total sales in its second quarter ended June
16, beating consensus estimates by 2 cents per share. That compares to 42 cents per share on $2 billion in sales
in the same period last year. In early trading the stock was up $1.88 per share to $38.63. Some investors figure
that Marriott is poised to move even higher with some analysts calling for this to be a $45 stock based upon expected
future earnings.
Maybe. Let's look at the upside first.
Marriott's properties include name brands like the Ritz-Carlton, Courtyard Marriott, Renaissance, and Fairfield
Inn. In all, the company now has more than 2,000 operating units throughout the United States and 57 countries.
To the company's credit, its revenue per available room (or RevPar, to those in the know) increased 7.6% at US-based
properties during the second quarter, while average room rates increased a healthy 5.6%.
Strength Across Businesses
This indicates that despite overcapacity concerns and worries that the economy might slow, people are still traveling
and staying at Marriott's properties. This is a good sign.
Further, Marriott's food-distribution business showed an impressive 47% increase in sales as it added several restaurant
chains to its customer base earlier in the year. This segment now comprises roughly 16% of total sales. The company's
senior living services segment reported a 21% increase in sales during the second quarter. This growth reflects
the addition of some 25 newly-opened communities. In all, the senior living business now makes up about 6.2% of
total sales.
I look at both of these businesses as simply a complement to the core business. While their success or failure
would certainly have an impact on the share price, I think that the direction of the share price is and always
will be dependent upon the profitability of its hotel business.
Potential investors should keep in mind that this is a company that's expanding extremely aggressively. It's planning
to add some 35,000 rooms per year for the foreseeable future. And, while the company has no more than 15% to 20%
market share in most of the markets it serves (indicating room for growth), I would make the case that this could
be dangerous if the economy does not experience the soft landing we are all hoping for.
Short-Term Risks Are Rising
Further, with higher lending costs, the profit margins for franchisees are getting squeezed. And, while the company
does have access to capital both through the banks, its existing cash balance, and the equity markets if need be,
I would suggest that the short-term risk-reward ratio is not favorable -- particularly if total occupancy or revenue
per available room begins to decelerate.
Finally, the need for routine maintenance and associated capital expenditures over the next 12 months add the potential
for even greater uncertainty.
Another important factor will be supply-and-demand pressures on the shares. The company repurchased 1.5 million
shares during the second quarter. And under its current stock buyback program, Marriott can repurchase another
20.8 million shares. But with insiders unloading more than 172,000 shares in the open market at prices ranging
from $33.07 to $35.76, I am also a bit more hesitant to consider jumping in at a new 12-month high.
One could make the case that after hitting a 12-month high, the stock could see a break-out of its trading range
and rocket higher. I would suggest that the near-term fundamentals might hold the stock back for a bit.
However, at some point the cloud of uncertainty surrounding the lodging industry will begin to lift. Institutions,
which have been fairly neutral on this stock over the past quarter, may start buying again, and the stock will
likely move higher.
Wait for the Coast to Clear
So isn't the stock a good opportunity for the long haul?
Sure. But if the economy continues to cool and interest rates move another hundred basis points higher, this could
be a whole new ball game. Remember that some of Marriott's properties are high-end properties. I have difficulty
believing that, if push comes to shove, travelers will be as willing to shell out an extra couple of hundred dollars
to stay at the Ritz.
Consensus estimates have the company earning $1.88 per share in 2000 and $2.16 per share in 2001. I wouldn't be
surprised to see some analysts tweak their estimates up a notch given the solid second quarter. But at 18 times
2001 estimates, the shares look fairly priced given the expected 14.9% earnings growth over the next year.
In sum, I would wait for the macroeconomic picture to clear a bit before jumping back into the stock. Lodging stocks
are beaten down, no doubt. But I would much prefer to buy something on the cheap. Marriott just doesn't appear
to be a bargain at this time. Glenn Curtis is an analyst for worldlyinvestor.com. Prior to working at worldlyinvestor.com,
he was an analyst at InsiderTrader.com, a financial Web site, and at Cantone Research, a brokerage firm in central
New Jersey. Curtis is series 6, 7, 24, and 63 licensed. Curtis does not hold a position in any stocks mentioned
in this column. Positions can change at any time.
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