Street estimates and management guidance look beatable. Relative valuation looks good. If only we were sold on this economic recovery.
We’re not buyers of this economic rebound so the defensive MAR looks more attractive to us than most lodging stocks. Unfortunately, MAR seems only to get relative respect in downturns. MAR is trading at 10.5x our 2011 EV/EBITDA estimate despite generating 90% of gross profit from fees; 86% of those fees are derived from franchise and base management revenue streams. As we’ve written about in the past, franchise fees and base management fees deserve a much higher multiple than volatile incentive fees although it doesn’t appear that the Street sees it that way. Analysts seem perfectly willing to slap on a 14x multiple on total fees generated by HOT regardless of whether they are base, franchise, incentive, or even non-cash fees! Still, we’d love to get MAR below 10x.
We’re ahead of the street for 2Q2010 and for the 2H2010 assuming current RevPAR trends continue into the back half. Our projections are for MAR to print $275MM of EBITDA and $0.30 cents for the quarter, which correspond to 6% and 9% higher than consensus, respectively. Here are the assumptions.
- Worldwide RevPAR growth of 6.6%, with ADR flattish across the board but positive for some brands like Ritz Carlton
- 5.4% YoY increase in system-wide rooms with a 2% increase in managed rooms and an 8.4% increase in franchised rooms
- Total owned and leased revenue of $261MM and gross margin of $32MM
- Ahead of the $25MM gross margin explicit in MAR’s guidance
- We assume that the margin excluding branding and termination fees increases to 4.6%
- Total fee income of $286MM which would be just above the high end of MAR's guidance
- Management fees up 10% to $138MM
- $40MM of incentive fees
- Franchise fees of $107MM, up 15%
- Timeshare segment results of $25MM and gross margins of $45MM, at the high end of company guidance
- G&A of $150MM, in-line with guidance
- Interest expense of $40MM and interest income of $5MM (below management guidance of $40MM, net)
- 36% tax rate, in-line with guidance