Daryl G. Jones
Risk Managed Long Term Investing for Pros
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.
What is the right multiple range for MAR’s hotel segment? Historically, MAR as a company has traded between 10x and 15x EBITDA. Of course, this always included the lower multiple timeshare business. Remember that MAR generates virtually all of its lodging profits from fees; management, incentive, and franchise fees. Surely, fee income should be valued higher than owned EBITDA due to the stability factor and the lack of maintenance capex associated with ownership. If you believe 2009 will be the trough, I cannot see putting a multiple below 10x on fee based EBITDA. On the high side, 15x seems reasonable due to the long-term demand for branded hotels globally.
So, if we throw away the time share business we are left with about $1bn in hotel EBITDA in 2009, per my calculation. Factoring in $400m in notes receivable and all of MAR’s year end debt yields a stock price range of $21 to $35. Other than the receivables, I’m not assuming any disposition value for the roughly $3bn in timeshare assets on the balance sheet. The valuation range leaves 11% downside and 47% upside. I sure wish I had a catalyst.
This is the first time in many quarters where I’ve felt that guidance was reasonable. I’m not saying there won’t be downside but at least estimates are reasonable. So MAR is starting to look interesting but, unfortunately, I cannot say the same thing for HOT: too much timeshare, too many owned hotels, and too much gateway city exposure.
The new CEO, Roland Smith, must get the organization to refocus on the Wendy’s brand. Also to the degree that Arby’s will not be lost in a corporation that did not have the focus of a pure restaurant company, it should perform better too. Roland Smith needs to get the brands off the treadmill of sameness, and provide consumers a reason to eat at Wendy’s and Arby’s.
It’s important to remember that the restaurant industry is a zero sum game. It’s not a coincidence that the mismanagement of the Wendy’s brand has coincided with outsized gains in same-store sales (market share) for both McDonald’s and Burger King. Clearly, part of the success of McDonald’s and Burger King has come on the heels of better advertising, new products and the demise of casual dining. Prior to 2004, when McDonald’s was in shambles, Wendy’s was a clear beneficiary of incremental market share. It’s a cycle that has been repeated many times in the restaurant industry. I’m betting that history repeats itself again.
The new organizational structure allows each business to be dedicated to building each brand independently, an important first step. The new vision for the organization will focus around the slogan, “Serving Fresh Ideas Daily.” According to management, the “Wendy’s/Arby’s Group, Inc. is committed to driving [its] business through fresh, innovative ideas, fresh, high quality food and a fresh, responsive approach to [its] changing business needs.”
At both brands management must be focused on taking aggressive actions to grow customer traffic, but not at the expense of margins. Currently, WEN is promoting three items at $0.99 that appears to be gaining traction in certain markets. This initiative is short sighted and will not have staying power. Over the long term, the focus should be on upgrading the breakfast offering, offering new products and providing a stronger, more relevant marketing campaign. To that end, the company has said that it plans to reformulate its coffee and retool morning-meal products; new marketing will emphasize the quality of the food.
Management has also stated that it is now focused on customers between the ages of 24 and 49. Looking at the changes in the demographic patters in the U.S., the focus on older customers could be rewarding. The trends for the 18-24 age group over the next 10 years don’t look good (please refer to my August 11 post titled “Young Adult Per Capita Meal & Snack Occasions are Declining”). Additionally, MCD and BKC are already slugging it out for that customer base.
At this point in time, I believe the franchisees system is rallying the troops behind Roland Smith and his management team. Everybody involved inside and outside the company knows there is really only one way to get the stock higher; bring back the customers!
Daryl G. Jones
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