Based on our numbers, Starwood is trading at 8.5x 2009E EBITDA and 9.5x 2010 EBITDA. Putting these multiples into historical context, HOT’s average EV/EBITDA multiple from 2000-1Q09 was 10x. However, if we exclude the 2007 multiples which were predicated on take-out speculation and 2008 prices that factored in a much higher 2009 EBITDA estimate, the average EV/EBITDA multiple falls to 9.0x. For those looking to bottom feed, the duration of that fishing expedition will be longer. As can be seen in the following chart, HOT’s EV/EBITDA multiple troughed at 6.5x in 2003, which is well below the current trading range. While the company is certainly less asset intensive than in 2003 and arguably deserving of a higher multiple, the gap to trough remains very wide.
Valuation is just one of the compelling reasons to be cautious on this stock. Estimates are too high, industry occupancy needs to stabilize, and barring an asset sale or amendment, HOT will surely trip its 4.5x leverage covenant in 3Q09.