Marriott International Inc.'s (MAR, Financial) home rental initiative could complement its core hotel offering and increase the size of its potential customer base.
The world’s largest hotel chain is aiming to increase its differentiation through improving the customer experience, while expansion in China may diversify its revenue in the long run.
Even though it has gained 9% in the last year versus a rise of 7% for the S&P 500, the stock could deliver further capital growth.
Home rental opportunity
Marriott’s investment in providing travellers with full residences through its home rental initiative is set to produce gradual revenue over the long run. It is working with property management companies to offer a selection of homes in a wide range of locations. Since 40% of the markets in which it is launching home rental services are new to the company, the strategy has the potential to catalyze its financial performance without affecting existing sales. The service also allows Marriott to access a wider range of travel experiences and expands its total addressable market to consumers who do not always choose to stay in hotels.
The company signed a multiyear agreement with Expedia (EXPE, Financial) in the most recent quarter that is expected to improve its Vacations by Marriott leisure packaging platform. The deal is also due to leverage Expedia’s technology to maximize returns for Marriott’s homeowners and franchisees. Since over 25% of the company's loyalty members have used a home rental service in the last year, there is a significant cross-selling opportunity on offer.
Growth strategy
The company’s focus on improving the customer experience could strengthen its competitive advantage versus sector peers. For example, it now offers keyless entry at over of its 1,400 hotels, while customers can check in at almost all of its locations. In addition, the business is set to roll out its enhanced reservation system to over 2,000 hotels by the end of the year. This provides customers with greater flexibility, allowing them to select a specific room based on factors such as floor level and view.
The 2018 merger between Marriott and Starwood is expected to produce further margin improvement. Since the merger closed, there has been a 50-point per annum rise in gross margin as a result of productivity synergies and economies of scale. A similar rate of annual improvement is forecasted by company management in the 2019 and 2020 fiscal years.
Threats
In the most recent quarter, Marriott's performance was mixed. For example, in North America, its revenue per available room increased less than 1% versus the same quarter of the previous year. The company’s weak performance in Korea lead to a rise in RevPAR of 3% in Asia Pacific last quarter, while its RevPAR in the Middle East and Africa declined 4% on a comparable basis. It was negatively impacted by a challenging operating environment in the United Arab Emirates. With an uncertain world economic outlook due to continued trade tensions, Marriott’s near-term operating conditions may be challenging.
In response, the company is seeking to expand into fast-growing markets such as China. The joint venture between Marriott and Alibaba (BABA) that began less than two years ago recorded a 200% increase in revenue in the most recent quarter. Alongside this, Marriott reported a rise in enrollments to its Bonvoy loyalty program in China of 100% in the same quarter. This accounted for 40% of all sign-ups across the company’s loyalty program in the most recent quarter. This suggests the business is growing in popularity in China, where rising wages could catalyze its financial outlook and help diversify its operations.
Outlook
The stock is forecasted to deliver a rise in earnings per share of 13% in the next fiscal year. A forward price-earnings ratio of 23 suggests it could offer fair value for money given its long-term growth potential.
Marriott’s focus on enhancing the customer experience could lead to improving levels of loyalty and a wider economic moat.
Its investment in home rentals may increase the size of its total addressable market, while margin improvement from the Starwood merger could continue.
Having modestly outperformed the S&P 500 over the last year, the stock could deliver long-term capital growth.
Disclosure: The author has no positions in any stocks mentioned.
Read more here:
- Weight Watchers: An Undervalued Recovery Play
- Global Payments Has Upside
- eBay Has Growth Potential Due to Low ValuationÂ
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
