MAR: TOMORROW’S CASHALYST

Mr. Marriott: BRING DOWN THAT CAPITAL SPENDING! I suppose it’s not as important as Reagan’s speech to Gorbachev but it is important to MAR shareholders.

MAR spent around $1 billion in total capex in 2008. The capex details are broken down in the table below. This is an insane amount of money for a company with a very attractive fee based business model that should not be this capital intensive. As my colleague, Anna Massion, said to me recently, “no wonder they get such a s****y multiple”. Yes, she has a potty mouth (her words), but she is also very smart. For 2009, MAR has already guided to a “cut” down to $700-800 million.

We think capex could be cut in half. Not only is such a cut possible, we think they will cut, maybe not half but certainly by $200-300 million. Timeshare looks like the most likely segment to be thrown on the chopping block. At their current sales velocity, MAR has over 4 years of timeshare inventory on hand versus a typical duration of closer to 2 years. This is money already spent. They will need to use their balance sheet to finance the sales of timeshare, since they are probably not tapping the securitization market any time soon, but our guess of what MAR needs to spend on timeshare is closer to $150MM in 2009. They don’t need to, nor should they develop anything aside from completing the projects that are already in sale.

New hotels are not being developed, financed, etc. Look for MAR’s equity and mezzanine investments to dwindle. Capex and Acquisitions of over $300 million in 2008 is puzzling to us. We will get more clarity on this item tomorrow but it surely looks like another chopping block candidate.

So the cash flow situation should, and probably will look a lot better. Where do we stand on the fundamentals? The Street is projecting 2009 adjusted EBITDA of about $1 billion. Thank God for HOT’s earnings release since it seems that sell side estimates are not that stale, for a change. We still think the EBITDA guidance should come down 5-10% but that is probably not out of line with buy side expectations. Remember, MAR doesn’t have the same susceptibility to RevPAR changes as do hotel owners. The fee based model limits the negative flow through. Additionally, MAR will not face the same FX headwinds as HOT.

We are certainly not making a top line call on business trends improving. With less than awful guidance tomorrow and the potential catalyst of a significant capex cut, however, MAR certainly looks a lot more positive than HOT did heading to its earnings release.

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