Long Term Value Opportunites in Hotels
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The world is an interesting place. Asia continues to grow though China's demographics have already reached their peak. Europe continues to suffer periodic repercussions from its debt crisis. Austerity measures are dragging down the weaker countries which are starting to impact Germany and France. The United States has entered into a low growth period with highly elevated levels of unemployment from the 2008 recession. It is in this environment that hotel companies are searching for growth. The hospitality industry is not a popular investment sector right now and this will give first movers an advantage.
H Operating Earnings Yield data by YCharts
Hyatt Hotels (NYSE: H) boasts 496 properties with 73% in the upper scale segment. Their decision to stay in the upper end of the industry will serve Hyatt well given their focus in the U.S. market and the challenging employment situation for lower income U.S. workers. The European crisis has not had an oversized impact on earnings as Europe, the Middle East, and Africa combined contributed just 15% of adjusted EBITDA in the first three quarters of 2012. Hyatt trades at very lofty valuations with a forward 2013 P/E ratio of 52.9.and yet they do not have an exciting growth story like Starwood. Additionally their ROA of 1.6% is low relative to their competitors. In the face of slow growth and low ROA Hyatt is best ignored.
Wyndham Worldwide Corp (NYSE: WYN) has three main business segments; hotels, exchanges and rentals, and timeshare development. This company is the world's largest hotel franchiser with over 608,000 rooms. It is important to remember that this company is very U.S. centric as only 29% of 2011 was international. A negative aspect of Wyndham is that they have a high total debt to equity ratio of 2.20. Excluding their debt level the company looks more positive. Their EBIT margin of 17.8% and profit margin of 9.5% are strong relative to their peers and based on expected 2013 earnings of $3.62 per share they trade at a reasonable forward P/E ratio of 15.5. Wyndham is one of the companies worth taking a position in. The company is not very exciting, but its cash flow is strong and comes at a reasonable price.
Marriott International (NYSE: MAR) has a number of well-known brands and is ready to grow in Asia. Currently 55% of their rooms are in North America, 25% are in Asia Pacific, and Europe comes in at 6%. In the 2012 to 2014 period Marriott expects the majority of room additions to be in North America and Asia which should give them a good opportunity to take advantage of Asian growth. A look at the numbers shows that Marriott's EBIT margin of 7.9% and profit margin of 4.5% are much lower than those of Wyndham. On a valuation basis Marriott looks rather expensive at a forward 2013 P/E ratio of 19.6. This company has a number of well-developed brands and is not overly exposed to the European crisis. Even with these positive factors a forward P/E ratio near twenty seems too expensive for a large company in such a competitive industry.
Starwood Hotels & Resorts Worldwide (NYSE: HOT) has undergone a great transformation in the past decade to become less U.S. centric and more asset light. Of Starwood's 95,000 room pipeline 64% are located in Asia Pacific with the U.S. coming in second at 11%. It is telling that in 2011 China almost had the same amount of international arrivals as the U.S. while China had 2.6 billion domestic trips compared to 2.0 billion domestic U.S. trips. This growth strong comes at a price as Starwood trades at a 2013 forward P/E ratio of 22.9. Their EBIT margin of 13.3% and profit margin of 9.3% are strong but still below those of Wyndham.
Conclusion
It is easy to turn on the T.V. and get overwhelmed by the amount of negative news. Some days it seems like the only dependable investment are T-bills with negative real interest rates. Even in this environment there are a few companies which have strong cash flow and attractive valuations. These firms may not have the best growth prospects, but they can still provide dependable returns. Wyndham is very U.S. centric with 71% of 2011 revenue coming from the United States, but it is still a strong company which is not grossly overpriced. Starwood offers strong growth with their large pipeline in the Asia Pacific region, but their forward 2013 P/E ratio of 22.9 is too high for comfort. Remember, the search for growth and the search for returns are not automatically the same thing.
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