A HOT End to 2014
the call to action
Starwood’s stock typically outperforms the market with better than expected RevPAR and earnings, and outperforms the sector with more capital return and announced asset sales. We’re optimistic on the former for most lodging companies and increasingly comfortable that investors will be favorably surprised with the amount of capital activity in 2H for HOT. Thus, the set up for HOT’s stock through 2014 looks bullish.
THE SETUP
Similar to other hotel stocks, RevPAR, earnings, and guidance should drive HOT. Building on that fundamental backdrop, HOT maintains several catalysts that could push sector outperformance in the back half of 2014 including heightened asset sales and capital return to shareholders. As can be seen in the following chart, Starwood’s stock has been correlated to changes in investor perception in these critical areas.
Here is why we’re optimistic that the catalysts will move in favor of the HOT bulls for the rest of 2014:
1) US RevPAR guidance may be exceeded: Q3 2014 US RevPAR trends are developing nicely QTD with the Luxury segment trending toward 7.5%, Upper-Upscale segment trends exceeding 8.5% and Upscale segment trending toward 10%. As a result, when HOT reports Q3 2014 financial results, we believe the company will be at the upper-end of guidance, if not exceeding the upper end of the guidance range. Additionally, the composition of RevPAR with average daily rate increases exceeding gains in occupancy, should result in strong profitability flow through as well.
2) More Aggressive Share Repurchase: Following several quarters of disappointing investor expectations on this topic, the early August announcement regarding an enlarged share repurchase authorization as well as expedited timing was welcomed. We now have increased confidence HOT may exceed still muted investor expectations in 2H 2014.
3) Asset Sales Finally? We have renewed confidence that asset sale announcements are forthcoming here in 2H. Stay tuned for this important catalyst.
4) New Chief Financial Officer – We understand Thomas Mangas is an investor community friendly executive with a very strong grasp of financial accounting as well as day-to-day operations. As such, we expect Mr. Mangas to quickly acclimate into the CFO role at HOT and following strong Q3 2014 earnings, will begin meeting with investors.
CONCLUSION
As can be seen below, HOT’s stock has underperformed year to date owing to a dearth of announced asset sales, and lower than expected capital return to shareholders. While the stock has relatively recovered somewhat since Q2 earnings season, we think upside remains in the back half of 2014. RevPAR tracking at the high end of company guidance should lead to a Q3 beat and we suspect that a few asset sales could provide a further catalyst. Finally, the company appears more willing to finally purse a more aggressive buyback strategy which has historically correlated with a rebound in the share price.
