In this article, let's take a look at Marriott International, Inc. (MAR, Financial), a $21.15 billion market cap company, which operates more than 3,500 hotels and 600,000 rooms in more than 50 countries.
Joel Greenblatt (Trades, Portfolio) initiated a position in the company with 73,899 shares according to his fund's latest filing. The guru's philosophy involves finding cheap stocks and looking for a catalyst, so let´s take a look at why he initiated a new position in this stock.
Ratings & Stock Price Performance
Credit Suisse reiterated its “outperform” rating as did JPMorgan Chase, while Barclays has boosted its target price to $89.
The stock's performance on a year-to-date basis is negative 1.41%, but in the 12 past months the stock has done well with a return of 18%. Yahoo!Ă‚ Finance estimates a one-year target share price at $86.8. In addition, investors will be paid a dividend of $1.00 at the end of the year, yielding 1.3%. Dividends have been paid since 1926 and during the past 13 years, the highest yield was 2.44%, the lowest was 1.05% and the median was 1.77%. According to Marketbeat, the one year target price is $83.11, with 8.03% upside potential.
Future Plans
The company plans to expand room and revenue share in the next 10 years, driven by a favorable next-generation traveler position supported by both renovated and newer brands, as well as its industry-leading loyalty program.
Almost all the hotels (far more than 90%) are franchised or managed hotels, generating strong cash flow. In general, these hotels have long-term contracts, about 20 to 30 years.
Further, Marriot plans to expand into new hotel brands. In 2000, it had 10 brands with 2,100 hotels; today there are 18 brands with 4,100 hotels. For 2017, the company expects over 18 brands with over 5,000 hotels.
Recent brand launches are focused on the growing lifestyle and select-service segment that target the next-generation explorer. The six brands that fall under lifestyle make up 15% of total rooms, while the seven select-service brands make up 52% of total rooms.
The company's international presence at the end of 2014 was composed principally by 237 properties (more than 44,500 rooms or suites) in Europe; 170 (more than 53,000 rooms) in Asia; 157 (more than 24,000 rooms) in the Middle East or Africa.
Looking at projections, we think revenue per available room could grow by 5% for this year and next. Growth in part will be helped by limited room supply growth in North America and Europe.
Revenues, Margins and Profitability
Looking at profitability, revenue grew by 6.68% and led earnings per share increased by 28% in the first quarter compared to the same quarter a year ago ($0.73 vs $0.57). During the past fiscal year, the company increased its bottom line. It earned $2.54 versus $2.01 in the prior year. This year, the Street expects an improvement in earnings ($3.09 versus $2.54).
Finally, let´s see a measure defined by Joel Greenblatt (Trades, Portfolio): the Return on Capital, which he analyzed it differently in his book “The Little Book That Still Beats the Market (Little Books. Big Profits)”. He defined Return on Capital as EBIT divided by the total of net fixed assets and net working capital.
The formula is: Return on Capital: EBIT/(Net Working Capital + Net PPE – Excess Cash)
Let´s compare the ROC which is one of the most important measures of the efficiency of a business and should be an important tool for investors.
| Ticker | Company | ROC (%) |
| MAR | Marriott | 81.76 |
| H | Hyatt Hotels Corp | 12.27 |
| WYN | Wyndham Worldwide Corp | 63.46 |
| DRII | Diamond Resorts International Inc | 31.50 |
| Ă‚ | Industry Median | 9.50 |
The ROC is higher than 90% of the 774 companies in the industry, including Hyatt Hotels (H, Financial), Wyndham Worldwide (WYN, Financial) and Diamond Resorts (DRII, Financial). During the past 13 years, Marriott International Inc's highest Return on Capital (Joel Greenblatt (Trades, Portfolio)) was 80.12%, the lowest was -14.36% and the median was 39.56%.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 28.55x, trading at a premium compared to an average of 22.7x for the industry. To use another metric, its price-to-sales ratio of 1.60x is below the industry average of 1.75x and is close to 10-year high of 1.78.
Final Comment
The hotel industry is benefiting from higher demand due to an increase in salaries and consumer´s income. We believe Marriot is well positioned to achieve interesting growth in the next years. Further, due to stronger-than-expected first quarter results and good price targets, I feel bullish on this stock.
Hedge fund gurus like Ken Heebner (Trades, Portfolio) and Tom Gayner (Trades, Portfolio) added this stock to their portfolios in the first quarter of 2015.
Disclosure: Omar Venerio holds no position in any stocks mentioned
