2 Hotel Stocks to Buy, 1 to Avoid

By Anjali Paliwal - October 19, 2012 | Tickers: H, MAR, HOT, WYN | 0 Comments

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The shares of hotel companies like Marriott International (NYSE: MAR), Starwood Hotel and Resorts Worldwide (NYSE: HOT), Hyatt Hotels (NYSE: H) and Wyndham Worldwide Corp (NYSE: WYN) have all shown solid performances over the last 3 months. The following chart summarizes the stock price movement of these companies with respect to the S&P500 over the last 3 months.

As a result, these companies are gaining investors’ attention. I see good upside potential in Marriott International and Wyndham. However, I suggest the investors to remain cautious on Hyatt despite its strong run.

Marriott International Inc

The market sentiment has turned cautious on Marriott International due to slowing RevPAR trends. However it is worth noting that despite posting lower than expected RevPAR growth (6% as compared to company’s guidance of 6%-8%), the company was able to beat consensus estimates for EPS and EBITDA growth in the recent quarter. The beat was largely due to lower-than-expected G&A expenses and aggressive share repurchase activity. I believe earnings and cash flow visibility for Marriott International are solid with limited supply growth and its strong U.S. exposure. I expect the aggressive buybacks to continue as the company has ample capital availability (aided by its recent $350 million bond issuance) and room under its target leverage ratio to continue repurchasing shares. Management now believes up to $1.1 billion in capital could be returned to shareholders, an increase from the $1 billion target previously contemplated. Trading at a forward P/E of 19x, the stock may look expensive at first. However, if we compare it with Starwood and Hyatt we see it's not that expensive after all. The following table summarizes the forward P/E and PEG ratios of Marriott, Starwood and Hyatt.

Source: Yahoo Finance

Clearly, Marriott is trading at a discount to its peers and has the lowest PEG ratio. While Starwood is trading mostly in-line with Marriott, Hyatt has a forward P/E of over 43 and a PEG ratio of 2.74 which certainly makes it look expensive. Moreover, Hyatt doesn’t provide any dividends while both Marriot and Starwood pay a modest dividend yield of 1.3% and 0.9%, respectively.

Wyndham Worldwide Corporation

No lodging stock fell as hard nor rebounded as strongly since 2007 as has Wyndham’s. In addition to the recovery in leisure demand, Wyndham’s success over the past three years can be attributed to the focused cash flow strategy formulated in 2009 and the consistent execution of this plan. Over the last year the stock has seen a huge run up (with a gain of over 75%) and the investors are now concerned that a further upside may be limited. However, I think it is good stock to buy despite the recent outperformance. The stock is still trading at a forward P/E of 15.2 and looks cheap on a PEG basis (0.94). Wyndham offers solid future growth prospects and also provides a good dividend yield. The following table summarizes the data for the future growth rates and dividend yields of Wyndham, Marriott, Hyatt and Starwood.

Source: Yahoo Finance

We can see that despite trading at a healthy discount (25%-42%) to its peers, Wyndham offers a similar growth profile. Moreover, the company has been regularly buying back shares and has also raised its dividend by 53% this year; its current dividend yield of 1.7% stands well above the peer average. Thus, these shareholder friendly activities will limit any downside risk.

The Bottom Line

Marriott International and Wyndham Worldwide Corporation are two lodging stocks I am bullish on. Both Marriott and Wyndham have strong growth prospects and appear cheap on a PEG basis. Wyndham is successfully implementing its cash flow strategy and continues to move its timeshare business toward a fee for services model, increasing profitability and efficiency (cash generation) in the process. With limited supply growth and strong U.S. exposure, Marriott has good cash flow visibility and I expect aggressive share buybacks to continue.

However, Hyatt looks overvalued at the current levels. The company does not provide any dividend and a 5% growth in net earnings in the last quarter does not justify a forward P/E of 43x. Moreover, Hyatt’s astonishingly high valuation multiple leaves negligible room for error in the future and thus, I see no reason to buy this stock over Marriott and Wyndham.

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