Lodging is a highly cyclical space and it tends to be an early cyclical mover. Many investors believe that 2009 numbers are “trough” and therefore deserve a higher multiple. For most lodging companies, especially owners of hotels, we would argue that 2010 will be a materially worse year than 2009. However, our EBITDA estimate for MAR is only 5% lower than 2009, mainly due to the following:
- MAR should still experience a nice benefit from room growth, as many of the hotels under construction today are already financed and will open
- MAR owns/leases few hotels – so there is less of the flow-through issue
- Over 50% of the rooms in MAR’s system are limited service, which is more “defensive” than Upper Upscale and Luxury segments. Ritz Carlton represents only 4% of MAR’s system rooms
- Only $850M or so MAR’s debt is getting refinanced in the next 3 years, with only the credit facility being likely renegotiated by YE 2010, so the mark-up on interest won’t be as painful for MAR as many other companies in the space
MAR is trading at 10.5x 2009 and 2010 EBITDA. Consistent with the last year, we are still below the Street consensus EBITDA estimates, by 4% and 10% for 2009 and 2010, respectively. On a P/E basis I have them at roughly 19-20x. To put current valuation in context we looked at where MAR has traded over this last decade based on actual forward results. See the charts below.
We believe that MAR’s P/E multiple troughed in 2008 at 14x our 2009E EPS estimate of $0.91. Using historical achieved EPS, P/E troughed at 14x in 2003 when the stock hit $14.43. EV/EBITDA multiples also troughed at 7.5x in 2003. The average forward P/E ratio over this time frame was 27x. However, if we exclude 2000, 2007 (peak take-out speculation) and 2008 (Street expectations were massively too high for 2009) the average is closer to 22x. The average forward EV/EBITDA ratio over this time frame was 13x. However, if we exclude the same periods as above the average is 11.5x.
The takeaway here is that current valuations are above trough valuations and are not significantly out of line with historical multiples. The problem though is that the road to recovery from this cycle may be slower and longer than most investors anticipate:
- Many of the cost cuts are not permanent
- Occupancy needs to stabilize before ADR begins to recover and we are nowhere close to that as Q1 is the first quarter where ADR will take a meaningful hit
- Flow through from ADR is much worse than Occupancy
- Higher group rates booked in early 2008 and 2007, will roll off the books in 1H09, and be replaced with lower rated AAA, AARP, airline crew, and OTA merchant bookings, which will then take a while to roll-off again when things improve
- When most of the 5 yr 2006 & 2007 CMBS financing roll in 2011 & 2012, companies will experience a huge markup on their cost of borrow. Same goes for financings put in place from 2006-1H2008
While MAR looks to be one of the best positioned, i.e. most defensive, lodging companies, the sector has had a huge run. Until occupancy stabilizes, the stocks are unlikely to sustain rallies, at least that’s been the historical precedent (see our 01/29/09 post “A GIRAFFE FROM HEAD TO TAIL”). Given our outlook, this space should be rented for near-term catalysts and not owned. For MAR the catalyst was Capex cuts (which we got) and improving investor sentiment. Now that we’ve achieved a 35% move in the stock since 3/6/09, there appears to be little reason to stay with it.