Starwood has beaten quarterly expectations 6 straight quarters.  We call that sandbagging, since the company knows that the analysts robotically model to management guidance.  What is more important though is that management also lowered full year guidance on five of those quarters.  We’re predicting that the streak won’t end in Q1.

We estimate 1Q09 EBITDA of $170MM and full year 2009 EBITDA of $750MM.  Our quarterly estimate is 11% higher than the mid-point of HOT’s guidance and consensus.  However, even with a projected Q1 beat, our 2009 estimate is 11% below the street and 14% below company guidance.  The gap between our EBITDA expectations vs. the Street widens further to 19% in 2010, as we project EBITDA of $675MM.   

Using a weighting of HOT’s top 10 US cities and reported Smith Travel data through March 21st we estimate that HOT’s US RevPAR will be down 24.5% in the 1Q09.  International RevPAR is tracking down 20% in local currency, while Mexico is flat-ish and Canada is negative -13% QTD, before layering in the FX drag.  As we wrote about in our MAR note “KEEP A TRADE A TRADE” (03/30/09), now that ADR is making a larger % of the RevPAR drop, the margin impact should be materially greater than what HOT experienced in 2008.  We assume no easing in RevPAR drop until 4Q09.  In 2010, we expect ADR to be down in the 3-5% range with occupancy increasing 1%. 

Our estimates assume cost cutting at both the SG&A level and at the property level. We assume that cost per occupied room “COSTPAR”, will decrease 5% in local currency and around 12% on an FX adjusted basis for 2009.  For 2010, we assume modest cost increases in the 50-100bps range at the property level.  However, we don’t think that there will be much room to cut costs, and therefore we expect another year of margin erosion.   We assume that SG&A decreases 15% in 2009 and remains flat in 2010.

Based on these assumptions, we expect owned, leased and consolidated JV margins will deteriorate 750 bps in 2009 and 340 bps in 2010.  As a reference point, the chart below shows what happened to margins during the last lodging downturn which began in 2001. HOT’s owned/ leased/ JV margins peaked in 2000 at 33.5%. Margins bottomed in 2003 at 22.5% after an 11% decline from peak to trough on a 15.9% cumulative RevPAR decline.  In the years to follow, cost growth ate away at the much of the RevPAR increases, with peak margins only recovering to 25.7% in 2007 on a cumulative RevPAR increase of 35.5%. 

HOT: Q1 ANOTHER BEAT AND LOWER - hot revpar vs margins

Fortunately, we’ve been on the right side of this story, first calling for margin and estimate cuts in our 06/23/08 post, “IF YOU DO MACRO YOU WON’T DO THESE STOCKS”, and continuing with the theme throughout the rest of 2008 and 2009.  We’ll take a shot trading these stocks from time to time but for right now, HOT and the sector are not likely to sustain any rally until estimates come down and occupancy stabilizes.

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