The Real Life Monopoly Game

By Chad Henage - July 12, 2012 | Tickers: IHG, MAR, HOT | 0 Comments

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I'm sure everyone knows how Monopoly works, you buy properties, and the goal is eventually to get a hotel on the property to maximize your rents. Well apparently in the real world hotel industry, buying up hotels has become the name of the game as well. In fact in the years 2004 – 2007, The Blackstone Group purchased six different hotel chains. This leaves investors with few choices if they want to capitalize on publicly traded hotel chains. In a recent article on The Motley Fool, Michael Lewis made the case for investing in Marriott International (NYSE: MAR). His premise was Marriott has an iconic brand and at least 16 different hotel brands in its portfolio. This got me thinking, which hotel chain would be the best investment? Let's roll the proverbial dice and find out who comes out on top.

Along with Marriott, we'll also include Starwood Hotels (NYSE: HOT) and Intercontinental Hotels Group (NYSE: IHG). Marriott includes its namesake brand, as well as Courtyard, Fairfield Inn and others. Starwood holds such brands as Sheraton and Westin hotels. Intercontinental runs its own namesake brand as well as franchises both Holiday Inn and Holiday Inn Express. You can see by including these names we get a pretty good cross-section of the industry. The industry is pretty simple to understand really. In theory, the perfect hotel would have very few vacancies, and very little overhead once it's built.

Though net income isn't the best measure of how well a hotel chain is doing because of large depreciation allowances, companies are first judged on earnings, take a look at how the three companies are valued:

Based just on the PEG ratio, it appears that Marriott could be the best value. While the company sells for the highest P/E ratio, Marriott also is expected to show the fastest growth going forward. (Marriott – 3, Intercontinental – 1, Starwood - 2)

While each company is expected to see good growth going forward, one company stands out in the consistency with which they beat earnings estimates. Look at the comparison:

You can see that only Starwood was able to beat earnings estimates every quarter in the last four. Companies that beat earnings on a regular basis usually are more highly valued in the market, when the company beats by a wide margin it gives the stock a boost. This category belongs to Starwood. (Marriott – 1, Intercontinental – 2, Starwood – 3) 

Net income can be deceiving with hotel chains. The amount of depreciation for each company contributes directly to what the company can give back to shareholders. For this reason, comparing free cash flow per $1 of sales gives us a better idea which company is the most efficient performer. On this score, the clear winner is Intercontinental. In the last year, the company generated $0.24 of free cash flow from each $1 of sales. This performance destroys both Marriott with $0.07 per $1 of sales, and Starwood with $0.05 per $1 of sales. (Marriott – 2, Intercontinental – 3, Starwood – 1)

Speaking of rewarding shareholders, dividends are getting a lot of press recently as investors clamor for yield. Dividends are made up of three things: yield, payout ratio, and dividend growth. Look at how these companies compare across the three measures:

With the leading yield and dividend growth, Intercontinental beats its competition. While Marriott has the lowest payout ratio, unless the company increases its dividend yield, this makes the dividend slightly safer, but not more desirable. (Marriott – 2, Intercontinental – 3, Starwood – 1)

Last but not least, we need to compare the company's balance sheets. Peter Lynch used to say that more losses occur in the stock market because investors don't understand companies balance sheets. The simplest measure of risk with these companies is long-term debt to total assets. Starwood comes out on top here with a long-term debt to total assets of 27.15%. Marriott comes in second with 30.73%, and Intercontinental has the most relative debt with 40.63%. (Marriott – 2, Intercontinental – 1, Starwood – 3)

Adding up the scores, the totals are: Marriott – 10, Intercontinental – 10, and Starwood – 10. It's a tie! However, the tie is really between Marriott and Intercontinental. The reason is, Marriott has the highest expected growth rate at over 24%, and while the company's dividend yield isn't as good as Intercontinental, the combined expected return could be as high as 25.92% (24.55% + 1.37%). Intercontinental is the clear leader if investors are looking for yield. With a dividend of 3.14%, and dividend growth of over 13%, investors who want current income should be pleased with this option. Starwood is sort of the odd man out. The company isn't growing as fast as Marriott, and can't match the yield of Intercontinental. If you want growth, go with Marriott, if you want yield, go with Intercontinental.

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