Eight analysts have raised their 2017 earnings forecast for our first idea—an international hotel company. Our second recommendation is a sale of a Japanese real estate security.
Buy: Marriott International (MAR)
From Capitalist Times
Marriot International’s (MAR) shares have rallied hard since the presidential election in anticipation of potential fiscal stimulus. More important, we continue to like the company’s focus on franchising (52% of total rooms at the end of 2016) and management contracts (44%), which tends to result in superior profit margins and return on investment capital. And with a portfolio of appealing brands, one of the strongest loyalty programs (100 million members that account for more than 50% of bookings) and one of the most frequented websites in the industry, demand for new franchises and management contracts remains strong and should continue to drive growth in available rooms.
Turnover of managed and franchised contracts remains low because of Marriott International’s scale and the strength of its reservation system. And on a practical level, the expense of renovating and rebranding a property is an impediment to exiting the program, not to mention contract termination fees.
In fact, the bulk of the 1 to 1.5% of the portfolio that turns over each year usually stems from Marriott International deciding to end the agreement because the property has become outdated or the location is no longer desirable.
The acquisition Starwood Hotels & Resorts Worldwide in September 2016 gives Marriott International a global luxury portfolio that complements its position in the US upscale market. Management’s guidance, unveiled at Marriott International’s recent investors day, calls for the company to grow its operating earnings at a compound annual rate of 7 to 10% through 2019, driven by a 6.5% annual increase in available rooms and $1.6 billion in sales. These targets don’t include potential synergies from the integration of Starwood Hotels & Resorts Worldwide.
The favorable supply and demand balance that initially attracted us to Marriott International remains in place, while the business model and mix should enable to the company to outpace industry growth and fend off competition from Airbnb and boutique hotels. Marriott International rates a buy on pullbacks below $90 per share.
Elliott Gue, Capitalist Times, www.capitalisttimes.com, 888-960-2759, March 30, 2017