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Starwood Hotels: Why Change Is Good

March 28, 2014 | About:
Pato Kehoe

Patricio Kehoe

7 followers

Today, Starwood Hotels & Resorts Worldwide Inc. (HOT) announced that its Co-President of the Americas, Osvaldo V. Librizzi, would be retiring from this role and serving as a non-executive Chairman until the end of 2015. The second Co-President, Sergio Rivera, will now be taking on the full responsibility of all hotel operations and decisions in the region. This change in management is part of Starwood’s new strategy to boost growth and push through new hotel concepts in emerging markets, such as Latin America, where the company already owns 80 hotels and has 20 more in its pipeline. Investment gurus like Steven Cohen (Trades, Portfolio) or Jim Simon’s hedge fund seem confident in the firm’s future developments, as they recently bought a large portion of Starwood shares. So, let’s see what’s in store next.

Overseas Expansion to Drive Growth

As the largest global operator of luxury and upscale hotels, Starwood has developed several strong brands in its portfolio over time, such as St. Regis, W, boutique hotels, Westin, Sheraton, Le Meridien, Element, and Aloft. This latter brand is set to pick up speed in the Australian market, where the company will be opening the Aloft Perth Rivervale hotel in late 2016. As was announced today, the hotel with 224 loft-like rooms will not only be the firm’s third hotel opening in Perth since 2012, but will also benefit from the areas redevelopment project to transform riverfront into a commercial and residential precinct. Furthermore, the hotel’s urban-influenced design, leading-edge technology, and social atmosphere are aimed to attract the newest generation of travellers, which will broaden the company’s customer base.

Furthermore, since 2000 Starwood sold over 100 owned hotels for $7.5 billion, in line with its strategic shift towards franchised hotel operations, which offer higher margins and returns, as well as lower fixed costs. The key growth driver, looking forward, will be the international market, with 80% of the company’s new pipeline located in this segment. In fact, by 2020 management plans to open over 60 new hotels in Europe, with a strong focus on Russia and Turkey. Now, while 95% of the company’s hotels are managed or franchised operations, its 5% company-owned hotels generate over 70% of overall revenue, making the firm more vulnerable to an economic recession. Thus, I think the recent shift towards international expansion and managed hotels will contribute to more stability, as well as increase the current 18.9% returns on invested capital in years to come.

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Valuation

While domestic growth has been stagnant over the past years, with the number of hotel rooms increasing by 0.9% in 2013 (long term average is above 2.5%), revenue per available room maintained a solid 6% growth rate for 2013. Furthermore, the luxury and upscale hotel markets are currently outperforming the overall industry, due to the above-average revenue derived from business travellers. However, fourth quarter 2013 showed mixed results, with revenue declining by 2%, consequence of the sale of owned hotels and flat EBITDA. But the company’s revPAR increased by 5.3%, and will grow to 5.5% for 2014. Starwood also bought back 1.2 million shares in the fourth quarter, thereby bumping the dividend yield to 2.2%.

Furthermore, earning per share grew at a solid 21.5% rate, closing at $3.3 for 2013, and investors should expect this figure to continue its upward trend in the long term future. Also, a 5% decrease in owned property expenses should allow for the current operating margin of 15.13% to expand gradually over the next five years. The new hotel pipeline will also contribute to stable revenue growth above 6% and EBITDA growth of over 12% in the long term. Although Starwood is currently slightly overvalued, trading at a price premium of 8% relative to the industry average of 21.5x, I think buying the stock during the second quarter of this year may be a clever move.

Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

About the author:

Patricio Kehoe
A fundamental analyst at Lone Tree Analytics

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