While we are impressed by the cost cutting progress HOT management has made, our enthusiasm is tempered by the timing and categorization of expenses. In Q4 HOT recorded “non-recurring” charges and expenses of $350-400MM offset by a gain on asset sale of around $175 million. Some of these expenses will clearly benefit 2009, making the margin gains somewhat suspect. The initial reaction of investors may be to push the stock higher due to less than toxic guidance but the stock is not cheap, the underlying fundamentals are much worse than the guidance indicates, and estimates are likely to continue you to come down.
The following are some of our observations:
• The fundamentals are awful in lodging and timeshare
• HOT continues to beat and lower guidance, a trend we expect to continue
• Timeshare write downs totaled $101MM – Q4 timeshare margin was 45%, around 20% higher than normal. The write down will likely continue to benefit margins and the margin gain is reflected in guidance. However, this does not change the economics at all.
• Q1 guidance is much worse than full year – It looks like HOT is banking on a 2nd half recovery which won’t happen.
• A deferred gain on sale of assets of $27MM is likely included in 2009 guidance as fee income, which already includes $83MM of amortizations of deferred gains from 2008
• The stock looks like it is trading over 9x EBITDA which is not cheap, particularly since some of the margin improvement (especially timeshare) is not sustainable.