We are maintaining our long-term Neutral recommendation on Starwood Hotels & Resorts Worldwide Inc. (HOT), a leading worldwide hospitality company, which primarily focuses on property ownership, management and franchising.
Starwood’s first quarter 2011 operating earnings outpaced the Zacks Consensus Estimate, primarily driven by better-than-expected demand for hotels. We believe the strength of Starwood’s brand allows the company to charge a premium for its hotel rooms. With average daily rate picking up and strong return of the group business, the company expects room rate to drive 50% or more of RevPAR growth in 2011. With 75% of corporate rate negotiations complete, Starwood expects to cumulate high single-digit rates in 2011. Leisure demand is also increasing as wealthier households are increasing their leisure expenses.
Moreover, Starwood has over half of its hotel properties outside the U.S., an international exposure that not many of its peers can boast. Additionally, over 80% of the company’s 85,000 room pipeline will be built in international markets. The demand for hotels in the international market is greater than that in the U.S. and the pace of recovery is particularly fast in the Asia-Pacific region. More than 60% of the company’s pipeline is focused toward the Asia-Pacific market. Within Asia-Pacific, China promises immense growth with visits expected to double by 2014.The other markets that Starwood is eyeing for expansion apart from China are Brazil, the United Arab Emirates and India.
Starwood’s three-year scenario is expected to generate excess cash flow of $1.7 billion to $2.2 billion through 2013 and a net room growth of 3–5%, excluding proceeds from additional hotel sales over that timeframe. Starwood also intends to de leverage its balance sheet to a targeted level of 3.0 times (gross debt/EBITDA) from the current 4.4 times.
Going forward, the company’s shift to a fee-based business model, a less capital-intensive timeshare business, strong cost containment efforts and revival in business travel will likely augur well for its earnings.
However, we remain cautious on the stock as RevPAR growth in 2011 may moderate due to tough comparisons from the World Expo in Shanghai, China that took place in the third quarter of 2010 and the lingering effects of the Japan earthquake and political turmoil in Middle East and Africa.
Starwood has 15 hotels in Japan and the company expects to make $20 million to $25 million EBITDA shortfall for the year in Japan. Additionally, unrest in Middle East and Africa remained another cause of concern. The company has 24 hotels across the affected countries, which includes all of North Africa as well as Bahrain, Syria and Jordan. Earlier, management expected to earn at least $15 million in fees in 2011. Following this geopolitical disruption, management estimates fees to be reduced to half, with no incentive fees earned and base fees down sharply.
Furthermore,a high rate of unemployment coupled with the company’s public and private debt burden is expected to limit growth going forward. In the developing countries, Starwood is facing stiff competition from domestic as well as international peers like Marriott International Inc(MAR) and Wyndham Worldwide Corporation (WYN). Additionally, given the company’s considerable exposure to foreign countries, Starwood remains prone to negative fluctuations in foreign exchange.
First Quarter 2011 Results
The company posted first-quarter adjusted earnings from continuing operations of 30 cents, which surpassed the Zacks Consensus Estimate of 26 cents. The earnings also topped the company’s guided range of 22 cents to 26 cents.
Revenues jumped 9.1% year over year to $1,295 million in the quarter, with revenue per available room witnessing a considerable growth in the quarter. The quarter’s revenue also outperformed the Zacks Consensus Estimate of $1,277 million.
System-wide RevPAR for same-store hotels increased 10.4% (9.1% in constant dollars) year over year all over the world. System-wide RevPAR for same-store hotels in North America rose 11.1% (10.4% in constant dollars). RevPAR in Asia-Pacific shot up 17.7% (11.3% in constant dollars) and 16.7% in Latin America (same in constant dollars).
Worldwide same-store company-operated gross operating profit margin was up about 90 basis points (bps), driven by a flat performance in the International segment and a 200-bp rise in the North American division.
Outlook
Starwood expects its second quarter 2011 earnings to be within 42 cents and 46 cents, with RevPAR increasing 7% to 9% in constant dollars for same-store company- operated hotels. Adjusted EBITDA is expected to range from $245 million to $255 million.
For full-year 2011, the company expects earnings in the range of $1.60 to $1.70 per share, with an increase in RevPAR between 7% and 9% in constant dollars for same-store company-operated hotels. Adjusted EBITDA is expected to range from $975 million to $1.0 billion.
Zacks Consensus Estimate
In the last 30 days, for fiscal 2011, 1 analyst has raised estimates. For 2012, 1 analyst has hiked estimate and 1 has slashed estimates, thus providing no clear directional movement and is in line with our Neutral recommendation.
Additionally, over the last 30 days, earnings estimates of $1.70 remains unchanged for 2011 and plunged 2 cents to $2.32 for 2012.
STARWOOD HOTELS (HOT): Free Stock Analysis Report
MARRIOTT INTL-A (MAR): Free Stock Analysis Report
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