MAR SHOULD ALLAY SOME FEARS NEXT WEEK

Business remains resilient in the face of economic concerns and while MAR won’t be aggressive, investors appear to be discounting significantly lower forward estimates.

 

 

Marriott will kick off 3Q earnings season next week.  While estimates have come down by 10% since their last earnings call we are still 3% below consensus for EPS and EBITDA given the continued drag of MAR’s DC exposure and lag effect of the company’s large group and convention business. 

 

That said, MAR’s stock is also down 25% since their last call, so I think it’s safe to say that investor expectations are not high for the quarter and there is a lot of fear built into future projections.  Like most if not all lodging names, the number one driver for this stock will be driven by the forward macro view.  We believe that most investors are at least partially pricing in a double dip and RevPAR potentially going negative over the next 12 months.  

 

We certainly wouldn’t want to own anything in lodging into a double dip; however, for the next quarter at least, we do expect RevPAR trends to accelerate as we wrote about in "LODGING: REVPAR REVS UP" (9/9/11).  In fact, September MTD RevPAR numbers have already improved.  If the economy continues to chug along at status quo levels, we think that MAR is a compelling story.  Valuation is at March 2009 trough levels, cash flow is significant and could surprise on the upside, and the timeshare spin off is a strategically value added transaction.

 

 

Here are our projections for the quarter:

 

We estimate that Marriott will report Adjusted EBITDA of $234MM and EPS of $0.26 – about 3% below the Street. 

  • World Wide RevPAR projected at 5.2% (non-comparable) and system-wide room growth of 2.6%
  • Marriott’s outsized exposure to the DC market will continue to be a drag on their RevPAR results in NA.  DC RevPAR from MAR’s 3rd FY quarter tracked down 1.2%, driven by negative ADR and flat YoY occupancy.  Approximately 5% of MAR’s domestic system-wide rooms are located in the Greater Washington, D.C. market and in 2010 the region contributed roughly 6% of MAR’s worldwide fee revenue and 13% of total incentive fees.
  • We estimate owned, leased, corporate housing and other revenue of $243MM – inclusive of $20MM of branding fees and $4MM of termination fees.   We assume a loss of $2MM on the core business compared to a loss of $12MM in 2Q10, and a 100% margin on branding and termination fees for total gross profit of $23MM.  In 2Q10, gross profit margin was only $7MM.
  • We estimate total fee revenue of $283MM – lower than MAR’s guidance of $285-295MM
    • $135MM of base management fees, up 9.4% YoY
    • $123MM of franchise fees, up 12.4% YoY
    • $26MM of incentive fees, up 25% YoY.  Assuming our base management and franchise fees are accurate, incentive fees would need to be up 55% YoY to hit the mid-point of management guidance. 
  • We estimate timeshare contract sales of $167MM, $267MM of sales and service revenue, and segment results of $27MM.
    • Down payments on sales, net of all incentives for financed timeshare sales need to equate to at least 10% of the purchase price according to GAAP before they can reported in current period revenue. In 2Q timeshare segment results were negatively impacted by a higher percentage of sales not meeting the reportability threshold and therefore ending up as deferred revenue. A good part of those sales should be recognized this quarter.
  • $165MM of G&A, which should trend higher QoQ as 2Q results included several one-time items including reversal of a $5MM loan loss provision and lower than expected workout costs which MAR believe will incur later in the year.  2Q also included $3MM of fees associated with the timeshare spinoff – which will likely also be present in 3Q.
  • $34MM of net interest expenses – same as 2Q and below guidance of $40MM

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