The hottest ticket in the hotel & hospitality sector may be the newly minted Marriott International (MAR, Financial), which at the end of 2016 completed its purchase of Starwood Hotels and is now finalizing integration procedures. The combined company is now the largest hotel chain on the planet.
Marriott is a highly recognizable brand and adding the Sheraton/Westin family of hotels has only increased this visibility. Marriott is poised to be strongly competitive in both the domestic and international hospitality markets, and has had strong financial performance that looks to continue.
Overall, we believe Marriott is at a special moment in its history. We recommend our readers buy Marriot International.
A history of financial strength
We see Marriott as a value stock. It currently trades at a price-earnings ratio of approximately 25, which is in the normal to lower range for Travel & Hospitality. Given the company’s recent transitions and growth prospects for the future, we see Marriott experiencing significant revenue growth moving forward.
Revenue has expanded rapidly over the last two years from $14.5 billion to $22.9 billion. That is an average yearly growth rate of more than 25%. If Marriot can sustain that kind of growth, investors could see handsome returns.
Gross profit has increased as well, as costs have not dramatically outpaced revenue. Gross profit over the last two years has grown from $2.1 billion to $3.7 billion, a 76% jump over that period. It is no small feat for Marriott to be achieving the kind of growth and profitability it currently faces. All indications are that the company can continue to grow, especially with the added leverage and size of the Starwood brand.
Perhaps most significantly, costs are not dramatically increasing. Total SG&A expenses grew from $634 million to $894 million, an increase of only 41% (in comparison to over 58% in revenue growth). It is an encouraging sign that Marriott is keeping its costs under control.
Despite 2017 seeing a marked increase in income tax expense for corporations across the Street, Marriott posted its highest ever net income as well. Net income reached $1.37 billion in 2017, up from $780 million the previous year. A 76% growth year-over-year is highly impressive for the hotel chain. As we recommend the stock, we do so in large part because it is generating real, solid, tangible profits.
Further, in looking at our favorite statistic, earnings per share surprise, Marriott also performs strongly. Over the last four quarters, Marriott has beaten industry earnings expectations by 11%, 12%, 12% and 7%, respectively, posting its highest-ever earnings per share in the second quarter of 2017 at $1.34.
A merger written in the stars
The great story of Marriott’s last several years has been its highly publicized merger with Starwood Hotels. Operator of thousands of Marriott hotels worldwide, the company now adds the Westin, Sheraton, W Hotels and St. Regis brands to its roster. According to Forbes Magazine, it is now the world’s largest hotel company with over $25 billion in assets and 6,000 properties.
In late 2016, Marriott and Starwood announced the merger. The terms of the merger were substantial, and included 0.8 shares of Marriot per Starwood share (which included $21 per Starwood common stock).
This past week, Marriott unveiled its plan for transforming the Sheraton Hotels brand and its new room layout and customer services strategy. Sheraton had been viewed by many as an old, aging brand, and Marriott made revitalizing it a top priority. They also announced the Marriott-Starwood combined loyalty program, integrating Starwood’s vast client base, back in April.
This merger is certainly one for the ages and redefines both Marriott’s brand and the role it plays in the domestic and global hotel markets. Hilton Hotels had long been the world’s leader and Marriott has finally usurped that title. By adding brands, assets and significant revenue drivers, Marriott is positioning itself to grow.
The possibility of future misfortune
We see a few potential risks for Marriott moving forward, largely economy-focused. Marriott could face a slow down in revenue growth if the economy were to tighten up and consumer spending were to drop. Consumer spending on discretionary expenses such as hotels and restaurants tends to suffer during periods of downturn. However, in the short-term, that does not look particularly likely.
Marriott could also hit snags in its integration of the Starwood Hotel system. Although industry opinions of the recently announced joint loyalty program have been generally positive, certain risks always exist when integrating two such large, well-known brands.
Verdict
When you see a value opportunity, seize it. Marriott is currently experiencing explosive revenue growth in its first years following its acquisition of Starwood. If the numbers can be sustained, even at half the current rate, the company will continue to generate very solid returns and cash flow.
We see Marriott as a highly attractive opportunity for investors with an interest in value and reasonable growth.
Disclosure: I/We own no stocks discussed in this article.
(This article was co-authored by Clyde Wm. Engle, Jr., an investment analyst with Almington Capital – Merchant Bankers.)
