MAR THESIS PLAYING OUT

Can’t control the macro but a strong Q3, solid forward guidance, and aggressive share repurchase keep the thesis intact

Marriott reported revenue and EBITDA that was 3% above our estimate but slightly below the Street.  EPS exceeded our estimate by 11% and Street estimates by 8% due to their aggressive share buyback in the quarter.  MAR bought back $550 million worth of stock in the quarter.  Given the free cash profile and low valuation, we expect the company will continue to be aggressive on this front.  The macro remains uncertain but long term, MAR remains in the enviable position of a growth company with little capital needs and a management team willing to deploy that cash flow in the most shareholder friendly way.

Detail:

• System-wide room growth was in-line with our estimate
• RevPAR came in better than we expected - partly due to a favorable FX impact
• Owned, leased, corporate housing and other revenue was $11MM better than we estimated driven by higher branding and termination fees, which also drove higher gross margins of $35MM vs. our estimate of $23MM.  Higher recurring branding fees deserve a high multiple.
  • Branding fees were $12MM better than we estimated or $32MM
  • Termination fees of $8MM were $4MM above our estimate
  • F&B and other revenues were $8MM lower than our estimate but partly offset by better RevPAR ($3MM)
  • CostPAR looks like it increased 3.9% YoY
• Fee income of $289MM was in-line with their guidance and $6MM better than we estimated
  • 50% of the better fee performance was due to higher incentive fees, while the balance was due to better RevPAR performance
• Despite contract sales beating the high end of MAR’s guidance, timeshare segment profits came in $5MM below our estimate
  • Contract sales were 7% above our estimate, entirely due to a spike in JV sales
  • Sales and service revenue net of direct expenses came in at $36MM vs. guidance of $40-45MM
• Other stuff:
  • G&A was $5MM higher than we estimated
    • $13MM of the increase was attributed to
      • $8MM of spin-off related expenses
      • $5MM related to the increase of a guarantee reserve for one hotel and the write-off of deferred contract acquisition costs.
    • Offset by $6MM of lower legal expenses (should be sustainable)
  • Net interest expense was $2MM higher than we estimated but $3MM below company guidance
  • Equity earnings were $3MM higher than our estimate and guidance
  • Tax rate came in at 32% vs our estimate of 34%
  • Diluted share count was 9MM lower than we estimated to a much more aggressive buyback