The Hotel Company of the Future
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Starwood Hotels (NYSE: HOT) is one of the world’s largest hotel companies, with hotels in about 100 countries that operate under nine very recognizable brand names. The company has rebounded very nicely since its 2009 low of $9.00 (congrats to everyone with the foresight to have bought then), however I believe there is still growth to be had in this best-in-breed company.
First, I’ll give you a little background about the company. Starwood’s businesses include 421 Sheratons, 190 Westins, 104 St. Regis and Luxury Collection hotels, 159 Four Points, 41 W’s (my favorite!), 99 LeMeridians, and 55 Alofts. Starwood has sold most of its hotel portfolio over the past decade (65 hotels for $5.6 billion since 2006), and now focuses mostly on its managed and franchised properties.
Approximately 66% of Starwood’s management revenue comes from its international business, and that is where the most growth is expected to come from going forward, for good reason. From 2010 to 2011, daily rates at American hotels increased 3.9%, while international rates increased 10% in addition to occupancy rising from 64% to 68%. Currently, Starwood is focusing most of its development efforts on Asia (specifically China); in fact over 44% of Starwood’s development resources are currently allocated to China.
According to consensus estimates, Starwood is expected to grow its earnings at a 15% average annual rate for the next three years, which more than justifies the lofty 22 times earnings the stock is trading at right now. If earnings estimates prove to be accurate, it implies that Starwood trades at 17.1 times 2014.
For comparison’s sake, I’d like to show why I think Starwood is very attractively valued by taking a quick look at a few of its competitors. Hyatt (NYSE: H) has a similar business model, with slightly less exposure to the high-end market. Their stock trades at an astronomical 68 times current year earnings, and although earnings are supposed to rebound nicely over the next two years, the company still trades at 38 times 2014’s consensus earnings. Industry giant Marriott (NYSE: MAR) operates over 3,700 properties and does include high-end brands such as Ritz-Carlton. Marriott trades at only a slightly more expensive valuation than Starwood at 23 times earnings; however it has less international exposure, which analysts seem to view as a negative, especially the lack of exposure to Asian markets.
Finally, the other close competitor, InterContinental Hotels Group (NYSE: IHG) operates about 1,150 hotels under brand names such as Crowne Plaza, Holiday Inn, and Staybridge Suites. IHG trades at a slightly lower valuation at 20.3 times earnings, however the company’s earnings were flat (no growth) for the past year and are expected to grow by only 10.7% for 2013.
I particularly like Starwood for its great international exposure and its higher presence in metropolitan markets than its competition, where hotel rates are rising at a faster rate than other areas. Starwood also differentiates itself from the competition by creating distinctive brands. The company’s newest venture, Element, is the first chain of luxury “green” hotels. I stayed at an Element while traveling recently and there is nothing else quite like it. Or the W line of hotels, which are geared toward the young professional crowd, are a very unique concept. Finally, the St. Regis line is a name than has been synonymous with luxury for many years.
Lastly, another reason to like Starwood is its history of being a very shareholder-friendly company. While they were forced to cut their dividend from $0.90 to $0.20 as a result of the financial crisis, the company made it a priority to make sure it was restored, and it was raised beyond that level in 2012 to $1.25 per share. Starwood also has a history of actively and aggressively buying back shares, having used most of their excess cash to repurchase over a quarter of the outstanding shares during the mid-2000’s.
Starwood is definitely a growing company with a unique, best-in-breed product in an industry that should flourish as the economy recovers; it is certainly worthy of consideration.
KWMatt82 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!