MAR: TRADING CASH FLOW FOR EPS

The hotel business is bad and getting worse. Estimates need to come down, again. I feel like a broken record. We’ve been very consistent in our negative view on lodging for the past 6 months. Our 12/10/08 post, “TIMESHARE TO CONTRIBUTE IN A DIFFERENT WAY” was the first non-negative lodging post we’ve had at Research Edge, ever.

Now for a second one. So why are we getting a little more positive? Answer: Cash flow. Certain lodging companies have the opportunity to curtail timeshare development and harvest the cash from this business. Timeshare is a hugely capital intensive business during the growth phase but highly cash generative as it winds down. Sure, timeshare has contributed to GAAP EPS growth over the past few years and that will wind down too, but book earnings have become almost meaningless. Even EBITDA multiples are becoming less important as a valuation technique here at the trough.

So why favor MAR over other timeshare/lodging operators such as HOT or WYN? There are a number of reasons. First, MAR hasn’t yet announced that it is reducing timeshare capex, so that catalyst is potentially ahead. We believe timeshare cash flow will turn positive in 2009. Second, MAR’s lodging business model is fee based and, thus, more defensive and not capital intensive. Cash flow is less sensitive to RevPAR changes than for a hotel owner. Third, MAR is the most diversified across lodging segments. Finally, MAR is the largest market cap company in lodging right now. Our macro/quant analyst (and our CEO), Keith McCullough, has identified market cap as a favorable factor right now.

MAR will report in late January and investors should be prepared for lower guidance. Thanks to some recent Johnny-come-lately downgrades, they probably already are. Cash is king here, not EPS.


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