Ticker: MAR Industry: Lodging Recommendation: Don’t Buy Pricing Closing Price: $33.36 52 Week High: $33.36 52 Week Low: $18.01 Market Data Market Cap: Total Assets: Trading Vol: $11.97 B $7.93B 4.34B Valuation Est Intrinsic Value: $18.22 EPS: - $.97 Div Yield: .49% Profitability ROA: ROE: Profit Margin: Oper Margin: Gross Margin: -.22% -27.44% -3.17% -.28% 6.28% Recommendation Overall Marriott is a strong company and a leader in the industry that had strong financial data before the recession. As the economy improves Marriott’s financial data will likely improve and could be stronger than before (due to international expansion, stronger branding, and restructuring their timeshare segment). Their fourth quarter 2009 net income was positive again and it looks like the first quarter of 2010 will be even higher. Marriott has also been successful at reducing their debt and increasing their free cash flow. Despite Marriott’s optimistic future there are several reasons now is not the best time to purchase the stock. Marriott is currently trading at it’s highest price in the past two years and given the current state of their financials Marriott is potentially overvalued. Due to their recent restructuring and losses last year it is too difficult to put a value on the company at this time. While I think Marriott could be a good buy in the future as their financials or the stock price decreases, my current recommendation is not to purchase the stock. Analyst Name Christy Pashia ccph2c@mail.mizzou.edu 1 Company overview Marriott International is currently the leader in the lodging industry with over 3,400 properties in the United States and 67 other countries. The company develops, operates, and franchises hotels, timeshares, corporate housing, and residential properties. Marriott currently operates under 18 brand names including Ritz Carlton and Renaissance hotels. Extended stay lodging 5% Business Segments synthetic fuel 4% Select service lodging 11% Timeshare 15% Full service lodging 65% Competitive Landscape The lodging industry is highly competitive and branding plays a very important role. Across the board the lodging industry has seen significant declines in their profits over the past two years due to the state of the economy. However some of the companies do not have as significant losses as Marriott (likely do to their limited positions in timeshares). Marriott’s main competitors are Intercontinental Hotels Group, Hilton Worldwide (private), Accor SA (private), Hyatt Hotels, and, Starwood Hotels & Resorts Worldwide Inc. 2 DIRECT COMPETITOR COMPARISON MAR Market Cap: 11.93B Employees: 137,000 Accor SA N/A Hilton IHG N/A 4.67B 158,1621 130,0001 N/A 10.91B 10.73B1 7.77B1 1.54B 6.28% N/A N/A 50.00% 155.00M N/A N/A 472.00M -0.28% N/A N/A 23.60% -346.00M 864.00M1 N/A 207.00M EPS (ttm): -0.971 N/A N/A 0.722 P/E (ttm): N/A N/A N/A 22.67 PEG (5 yr expected): 3.44 N/A N/A N/A P/S (ttm): 1.08 N/A N/A 3.01 Revenue (ttm): Gross Margin (ttm): EBITDA (ttm): Oper Margins (ttm): Net Income (ttm): H HOT 6.91B 9.35B 45,000 145,000 3.33B 4.71B 17.38% 21.82% 318.00M 678.00M 1.80% 8.60% -42.00M -1.00M -0.284 0.406 N/A 123.28 N/A 40.26 2.03 1.95 Industry 1.37B 7.10K 456.96M 40.14% 68.85M 5.41% N/A N/A 22.02 3.55 1.09 Strengths Brand name: Branding is very important in the hotel business and so far Marriott has done a good job creating a strong brand. Marriott tries to give their customers a quality experience and their mid to higher end hotels have the Marriott name on them while their lower end hotels only have the name of the specific hotel. They also have Marriott rewards and offer strong incentives for customers to stay with them for business or leisure no matter what part of the world they are in. Economies of scale: Since Marriott has the largest market cap and so many different hotels they are able to operate their hotels at a lower cost than many of their competitors. They also have a much larger backing for expansion and renovation due to their size and past success. 3 International expansion: A larger international presence will allow Marriott to take advantage of their strong brand name. Expanding outside of US borders also allows Marriott to have more growth and earnings potential since there are already so many Marriott hotels in the US. The expansion will allow Marriott to generate new customers and encourage existing customers to stay at Marriott more often. Weaknesses/Risks Lodging and timeshare industry risks: Marriott faces substantial competition and could face losses due to changes in availability/demand of rooms, price/marketing strategies of competitors, and desirability of locations. Operational risks: Marriott is highly susceptible to international and regional conditions and could suffer from a decrease in earnings due to poor economic conditions or perceived safety of certain regions. They also run the risk of creating new brands that are unsuccessful in the future. Development and Financial Risks: The company is exposed to substantial exchange rate risk from having such a strong international presence. They also have risk associated with the constructing new buildings or renovating existing properties due to change in project cost, completion, and resale risk. Future Marriott is currently developing over 600 new hotels and more than one-third of them are international. A large percent of Marriott’s growth is expected to come from expanding in Asia, Europe, the Middle-East, and South America. Asia is their fastest growing market with 114 current properties and 55 more being built. Analysts estimate that Marriott will have a 53% growth rate this year and an 11.5% annual growth rate for the next five years. Also 96% of analysts believe the company is a hold or better. Breakdown of Ratings Strong Buy 4 Buy 10 Hold 8 Underperform 1 Sell 0 4 Intrinsic value Since Marriott had a negative net income this year I used a three year average and took into account the one-time loss in restructuring their timeshares in order to value the company. As sales improve and the company expands more they have high growth potential over the next few years. Then I used a more conservative growth estimate and an interest rate of 10%. Using these parameters the intrinsic value is $18.22 and the company is currently selling for $33.36. Therefore the company is overvalued by $15.14. However I am not sure how accurate this is given the companies unusual losses. Financials Marriott has the largest market cap in the industry of $11.97 billion. Over the last 6 years they have consistently outperformed the S&P 500 Hotels, Resorts, and Cruise Lines Index in terms of return on initial investment. 5 The company experienced a net loss of $364 million in 2009. The poor performance is attributed to a poor economy and losses/impairment charges of Marriott’s timeshare sector. Since the company suffered from a net loss, EPS was -$.97 last year; however the company began to turn around in the fourth quarter and had a positive EPS of $.11. The EPS for the first quarter of 2010 also look optimistic Marriott was able to reduce its debt load by $800 million (a 26% increase in 2009). They also generated $150 million in free cash flow. 6 7 8 9 Resources Marriott.com Marriott 2009 annual report Wall Street Journal Yahoo Finance 10