In this article, let's take a look at Starwood Hotels & Resorts Worldwide Inc. (HOT, Financial), a $15.99 billion market cap company, which operates as a hotel and leisure company comprised of a network of approximately 1,100 full service hotels, vacation ownership resorts and residential developments.
International Markets
The company is well positioned to grow in international markets, with strong operations outside of the United States.
In the past, it has sold hotels (more than 100) for more than $7.5 billion. The principal mode is to change them to franchised hotels. This way, it gained higher returns, lowered fixed costs, and had a more constant cash flow than in the case of owning the hotels.
Main Risk
A principal risk in the case of an economic downturn could come from its owned hotels and time-share resorts, which accounts for more than 70% of revenue. This could be better used if the firm enters into a sale or spin-off process of its time-share division, which has low return for it.
Future Growth
The company has a good future in the U.S. market because of favorable credit conditions and weakness in the commercial mortgage-backed security market.
We project the number of hotel rooms to increase by only 1.2% in 2014, compared with the long term average of more than 2.5%.
We believe revenue per room could continue growing at a high rate because of limited supply. Further, unemployment or high gas prices do not impact in high-income travelers in a severe way.
Other Actions
The company has divested on several hotels for quality reasons, and invested important cash to revitalize the Sheraton brand. Sheraton is now outperforming its peers.
Estimated One-Year Price
According to Yahoo! Finance, the estimated one-year target share price is $87.97, so if you buy shares at current market price ($83.63), your return from price appreciation would be 5.2%. In addition, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of $1.40 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on an investment for a stock, and in this case is 1.7%. So the total expected return for investing in Starwood Hotels is about 7%.
Revenues, Margins and Profitability
Looking at profitability, revenues decreased by 1.48% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.80 vs $0.71). The net income increased by 11.7% when compared to the same quarter one year prior, going from $137 million to $153 million and has exceeded that of the industry average.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| HOT | Strarwood Hotels | 17.10 |
| H | Hyatt Hotels Corp | 4.57 |
| CCL | Carnival Corp | 4.51 |
| DRII | Diamond Resorts International Inc | -7.32 |
| RCL | Royal Caribbean Cruises Ltd | 6.16 |
| Â | Industry Median | 7.45 |
The company has a current ROE of 17.1% which is higher than the industry median. Also, it is higher than the one exhibit by Hyatt (H, Financial), Carnival (CCL, Financial), Diamond Resorts (DRII, Financial) and Royal Caribbean Cruises (RCL, Financial).
In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So, this company satisfies those levels. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 27.8x, trading at a discount compared to an average of 29.10x for the industry. To use another metric, its price-to-book ratio of 5.10x indicates a premium versus the industry average of 2.34x while the price-to-sales ratio of 2.7x is above the industry average of 1.71x.
As we can see in the next chart, the stock price has an upward trend in the five-year period.
Final Comment
Starwood is the world's largest operator of luxury and upscale hotels with more than 95% of its hotels managed or franchised in growing markets. Also, the good performance shows in the ability to generate an average 20% return on invested capital in the last five years.
Further, the PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.
Hedge fund gurus like Chuck Royce (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and John Rogers (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as First Pacific Advisors (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned
