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MAR 3Q2010 CONF CALL: "NOTES"

Our takeaway from the call is that despite their bullishness, they have little visibility on 2011.

 

 

“We are having an outstanding year. Corporate and leisure demand continues to strengthen, and we are
leading the U.S. industry in pushing retail price increases.... We expect 2011 to be even better than 2010 as demand and pricing continue to strengthen. We are currently forecasting 2011 systemwide worldwide REVPAR to increase 6 to 8 percent."

- J.W. Marriott, Jr., chairman and chief executive officer

 

HIGHLIGHTS FROM THE RELEASE

  • RevPAR commentary:
    • NA systemwide: +7.2% percent with ADR up almost 2%
    • International systemwide: +12% on a constant dollar basis (8.5% in local dollars)
      • Asia Pacific:+20% with China was especially strong
  • Cosmopolitan Hotel in Las Vegas will open in December with 3,000 as part of the Autograph Collection
  • "For the Marriott Hotels and Resorts brand in North America, nearly 90 percent of hotels raised corporate retail rates in the quarter and, overall, such retail rates rose 9 percent."
  • 32 new properties (5,056 rooms) entered the MAR system, while 3 properties with 667 rooms exited the system in the 3rd quarter
  • Pipeline: 95,000 rooms / 975 properties
  • "Worldwide comparable company-operated house profit margins increased 90 basis points... House profit
    margins for comparable company-operated properties outside North America increased 170 basis
    points and North American comparable company-operated house profit margins increased 30
    basis points from the year-ago quarter. Excluding the impact of cancellation and attrition fees in
    the 2009 quarter, North American comparable company-operated house profit margins increased
    60 basis points year-over-year."
  • Comparisons on owned, leased, corporate housing and other revenue, net of direct expenses, were negatively impacted because 3Q09 had $6MM of cancellation fees.

 

CONF CALL NOTES

  • The business traveler is back
  • There is no indication in their business of a double dip. The recovery in lodging is broad.
  • Supply growth is estimated at 2% in 2010 and forecasted at just 0.4% in 2011
  • Waived minimum hour requirements to get health insurance for their employees
  • Discounted rate room nights were reduced by 16% in the quarter and replaced with corporate guests who paid $57 more per night on average. 
  • Pricing in their limited service hotels is lagging but showing signs of improvement
  • Group nights were up 6% in the quarter and 30% of room nights were booked within 3 months.  Group booking pace is now ahead YoY by 1%.
  • For bookings made in the 3Q for 2011, arrivals ADRs were up 4%
  • Special corporate room nights were up 27%
  • Saw particular RevPAR strength in Germany, China and the UK
  • Expect to double their presence in China over the next 3 years and triple their presence in India over the next 5 years
  • 70% of their full service pipeline is in international markets and 7,000 rooms in their pipeline are awaiting conversion
  • Have another 4 hotels signed/approved for conversion to Autograph; Marriott rewards members already make up 40% of the Autograph guests
  • 40% of contract sales in the quarter were to new customers
  • Timeshare rental revenue increased 8% YoY and recorded a $15MM benefit to the loyalty program due to projected lower redemptions
  • Expect this business to generate $175MM in cash this year and even more in 2011
  • Expect to see a material increase in the year for the year bookings. Expect a large increase in ADR due to mix improvement and higher rates charge.

Q&A

  • Margins for timeshare given that the point system is supposed to have better margins?
    • Not sure yet.  They think that the point system will make their product more attractive to their customers
  • Don't have a budget for 2011 yet
  • Helping fund some lobby renovations for the Courtyard brand?
    • The cost is included in their capex estimate. In some cases they are providing mezzanine loans or credit enhancements - total cost is in the 10's of MM's not 100's
  • Government per diem's may go down YoY in 2011 - how will that impact them?
    • Think that in high demand markets, the government business will get squeezed out of mix
    • Thinks that weakness here will be offset by strength in corporate
  • Reason for the AC JV?
    • Their growth has been anemic in Spain and think that having a good partner in that market is really important
  • Lower RevPAR numbers for Renaissance are related to their heavy group mix
  • See tremendous strength in the Ritz brand this fall
  • The 9,500 room JV with AC isn't included in their pipeline numbers. The earnings impact from this venture in 2011 won't be "terribly significant"
  • They are starting to build some cash reserves and will be looking to put that cash to work - so they will be looking to begin share repurchases again
  • RevPAR will be the largest driver of base and management room growth, followed by unit growth (should be about 4% net with system deletions at around 1% of their system - which is around 6,000 rooms)
  • Anticipating at least a 20% increase in incentive fees in 2011 ("or better")
  • Why aren't they seeing a bigger flow through in their owned, leased, corporate housing and other net business?
    • Well, there are a lot of other things in there
    • Do expect some margin expansion in their owned and leased business
  • Brand expansion into the BRIC cities are a focus of growth for them
  • More detail on the high single digit corporate rate increase?
    • They are still very early in the process - so they don't have any detail
    • Part of the high single digit rate increase comes from rate increases but part comes from mix change
  • Expect that most of the 6-8% RevPAR guidance for 2011 to come from rate increase
  • Comp growth will be the largest driver of G&A growth. Expect to do some incremental brand investment.
  • Nights on the books for 2011 are actually lower than where they were for 2010 at this point in the year, but short in bookings are stronger.
    • AKA they have no visibility
    • Revenue on the books for 2011 is actually down 2% from what they had on the books this time in 2010.  Although when they started the year they made up 16% - meaning that at the beginning of the year their booking on the books were 16% below and now they are flat.
  • Lending is improving - but only slightly
    • Leverage ratios are still a lot lower and the terms are still short
    • There are a lot of personal guarantees required ("bad boy guarantees")
  • Capex of $500MM in 2010 and expect a little more spend next year if the opportunities materialize
  • Think that supply growth will remain anemic for a few years
  • Part of the strong incentive fee growth is due to the international system growth where hotels start paying fees on day 1
  • Management's answer to the question about lower guidance was deceptive - "fine tuning" ... hmm let's just close our eyes and pretend we didn't lower the top end range of guidance - we just fine tuned it. But they do admit that the gains benefit them by a few cents for the year
  • In Q3 fee growth was negatively impacted by lower transfer fees, FX  and new signings
  • They aren't grouping down but they are driving rate... (i.e. group will not decrease as a % of mix). Their budget is banking on being able to push through rate increases
  • We liked this question:  what gives them confidence that they can get high single digit rate growth despite the economy deterioriating this quarter?
    • THEY DON'T ITS WISHFUL THINKING... THEY HAVE NO VISIBILITY ASIDE FROM THE REAR VIEW MIRROR - they said themselves that the booking window is short
    • Ugh... and because rate increases are fair... fair is what you can get
      • Ok we all know how this conversation goes... remember last time you asked your boss for a big bonus because you thought it was only "fair"
  • The more modest your expectations are for the economic outlook in 2011 your opinion of RevPAR will certainly be impacted... and their guidance is clearly based on more bullish views of GDP growth for 2011 than ours and consensus.

INITIAL CLAIMS DROP 11K BUT REMAIN IN THEIR YTD RANGE

Initial Claims

Initial claims fell 11k last week to 445k (falling 8k before the revision of last week’s data).  Rolling claims came in at 455.75k, a decline of 2k over the previous week. While the rolling claims number was incrementally bullish, 455k rolling is still within the year-to-date range of 450-470k.

 

One caveat to the bullishness of today’s print is the frequency of adverse (upward) revisions to claims the following week. Financial blog Zerohedge.com points out that of the last 24 weekly initial claims announcements, 23 have been revised higher.  If we assume that an upward revision is as likely as a downward revision, the odds of this happening by chance are approximately one in 699,000 (x = 24 / 2^24).  On a year-to-date basis, the picture isn’t quite so skewed, but the cumulative revisions (sum of each week’s revision) is nevertheless greater than 80,000. For reference, and for those interested in our probability methodology, we determined the probability by calculating the total number of possible outcomes, given that each week’s revision was equally likely to be upwards or downwards and was independent, which is 2^24.  Of those, 24 outcomes include 23 upwards revisions and one downward revision ("24 choose 23" or 24 choose 1 for combinatorics geeks).  24/2^24 is 1.43x10^-6, or 1 in 699,000.)

 

INITIAL CLAIMS DROP 11K BUT REMAIN IN THEIR YTD RANGE - 1

 

INITIAL CLAIMS DROP 11K BUT REMAIN IN THEIR YTD RANGE - 2

 

To reiterate, our firm's expectations for an ongoing economic slowdown relative to the first half of the year and into 2011 will keep a lid on new hiring activity as management teams focus on cost control. All of this raises the risks that a prospective slowdown in GDP will precipitate an incremental slowdown in hiring/pickup in firings, which will, in turn, further pressure growth. We continue to look to claims as the best indicator for the job market, as they are real time and inflections in the series have signaled important turning points in the market in the past.

 

On a related note, we are publishing below a post from our Macro team on the Food Stamp program participation. To quote from that post: "Whether the NBER says so or not, the recession persists for many Americans.  A record 41.8 million participants received food stamps in July as part of the Supplemental Nutrition Assistance Program, according to government data.  Furthermore, the White House estimates that an average of 43.3 million people will get food stamps each month in the twelve months that began October 1st, 2010.  The rising costs of food and energy (dare I say it, “inflation”), and the lack of job creation, continues to hurt the consumer – especially those at the low end of the spectrum."

 

INITIAL CLAIMS DROP 11K BUT REMAIN IN THEIR YTD RANGE - 3

 

In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.

 

INITIAL CLAIMS DROP 11K BUT REMAIN IN THEIR YTD RANGE - 4

 

 

Joshua Steiner, CFA

 

Allison Kaptur



THE M3: NEVES REVISES FORECAST AGAIN; CLOSER TO LAND DECISION

The Macau Metro Monitor, October 7th 2010

 

MACAU GAMING REVENUE TO RISE ABOVE 50% IN 2010: REGULATOR macaubusiness.com

DICJ chief Manuel Joaquim das Neves said, “It is now possible to say that [gaming revenue] will increase more than 50 percent year-on-year."  His previous estimate was 30% growth.  Neves added that Oct 3 and 4 GGR set daily records.


GOV'T CLOSER TO UNUSED LAND DECISION Macau Daily Times

We're getting closer, says director Carion of the The Land, Public Works and Transport Bureau (DSSOPT).  “The technical part of the evaluation is already done,” he added.

 

 

 

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%

INITIAL CLAIMS DROP 11K BUT REMAIN IN THEIR YTD RANGE

Initial Claims

Initial claims fell 11k last week to 445k (falling 8k before the revision of last week’s data).  Rolling claims came in at 455.75k, a decline of 2k over the previous week. While the rolling claims number was incrementally bullish, 455k rolling is still within the year-to-date range of 450-470k.

 

One caveat to the bullishness of today’s print is the frequency of adverse (upward) revisions to claims the following week. Financial blog Zerohedge.com points out that of the last 24 weekly initial claims announcements, 23 have been revised higher.  If we assume that an upward revision is as likely as a downward revision, the odds of this happening by chance are approximately one in 699,000 (x = 24 / 2^24).  On a year-to-date basis, the picture isn’t quite so skewed, but the cumulative revisions (sum of each week’s revision) is nevertheless greater than 80,000. For reference, and for those interested in our probability methodology, we determined the probability by calculating the total number of possible outcomes, given that each week’s revision was equally likely to be upwards or downwards and was independent, which is 2^24.  Of those, 24 outcomes include 23 upwards revisions and one downward revision ("24 choose 23" or 24 choose 1 for combinatorics geeks).  24/2^24 is 1.43x10^-6, or 1 in 699,000.)

 

INITIAL CLAIMS DROP 11K BUT REMAIN IN THEIR YTD RANGE - rolling

 

INITIAL CLAIMS DROP 11K BUT REMAIN IN THEIR YTD RANGE - raw

 

To reiterate, our firm's expectations for an ongoing economic slowdown relative to the first half of the year and into 2011 will keep a lid on new hiring activity as management teams focus on cost control. All of this raises the risks that a prospective slowdown in GDP will precipitate an incremental slowdown in hiring/pickup in firings, which will, in turn, further pressure growth. We continue to look to claims as the best indicator for the job market, as they are real time and inflections in the series have signaled important turning points in the market in the past.

 

On a related note, we are publishing below a post from our Macro team on the Food Stamp program participation. To quote from that post: "Whether the NBER says so or not, the recession persists for many Americans.  A record 41.8 million participants received food stamps in July as part of the Supplemental Nutrition Assistance Program, according to government data.  Furthermore, the White House estimates that an average of 43.3 million people will get food stamps each month in the twelve months that began October 1st, 2010.  The rising costs of food and energy (dare I say it, “inflation”), and the lack of job creation, continues to hurt the consumer – especially those at the low end of the spectrum."

 

INITIAL CLAIMS DROP 11K BUT REMAIN IN THEIR YTD RANGE - foodstamps


Yield Curve

The following chart shows 2-10 spread by quarter while the chart below that shows the sequential change. The 2-10 spread (a proxy for NIM) has been under significant pressure for the last few quarters and that pressure is showing no signs of abating. Yesterday’s closing value of 201 bps is down from 207 bps last week.

 

INITIAL CLAIMS DROP 11K BUT REMAIN IN THEIR YTD RANGE - 2 10 by Q

 

INITIAL CLAIMS DROP 11K BUT REMAIN IN THEIR YTD RANGE - 2 10 QoQ

 

The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL CLAIMS DROP 11K BUT REMAIN IN THEIR YTD RANGE - subsector perf

 

Joshua Steiner, CFA

 

Allison Kaptur


MAR STILL POSTURING

Q3 was good but not great.  Q4 EPS guidance is a little disappointing.  But 2011 top line will be fantastic?

 

 

Despite the whispers of a big beat this quarter, MAR’s 3Q results and 4Q guidance was simply in line with consensus.  In fact, management lowered the high end of guidance across a number of line items.  The bulls will point to 6-8% RevPAR guidance for 2011 which is nice but a bird in the hand is worth two in the bush.  The bird in the hand is the near term while lofty RevPAR expectations for next year are clearly “in the bush”. 

 

We continue to think MAR is posturing for its ongoing corporate rate negotiations.  Thus, 2011 RevPAR guidance is on the aggressive side in our opinion and conference call commentary regarding the status of negotiations will likewise be bullish.  However, as we wrote about yesterday in our note, "WE'VE GOT A BRIDGE TO SELL YOU," we think corporate pushback is stronger than expected and the lodging companies may not have as much leverage as investors have been led to believe.  RevPAR visibility is not high enough to be so bullish, in our opinion.

 

As we’ve written about, we think there is empirical evidence to show that absolute seasonally adjusted RevPAR has been slowing since July.  The April to July period was above RevPAR trend, in our opinion, which will make RevPAR comparisons very difficult in Q2 and Q3 of 2011 and could actually go negative in some months.  We think 3-4% RevPAR growth is more likely than 6-8% and as such, we remain below the Street in our EPS estimates beginning in Q2 2011.

 

 

Tidbits and Takeaways from 3Q2010:

  • There was a deceleration of room growth across almost all brands
  • Occupancy growth is decelerating as comps get harder.  The real question is whether ADR will pick up where occupancy growth left off to continue the 8%ish trend.
  • Owned, leased, corporate housing and other revenue, net of direct expenses of $7MM came in $3MM below MAR’s $10MM guidance.
    • Even if we remove the $6MM of cancellation fees that benefited 3Q09, revenues would have been flat YoY
    • We estimate that owned and leased room revenues should have been up around 6% given the relatively flat YoY room count and the increase in RevPAR.  Therefore, if branding fees were flat around $19MM, this implies that food & beverage & other revenues declined almost 5% YoY at these properties.
  • Total fee revenue came in at the high end of guidance
    • Incentive fee growth slowed to 23.5% from over 30% last quarter, although to be fair the company indicated that growth would be a little less in the 3Q than in the 2Q.
    • Only 23% of hotels paid incentive fees vs. 25% in 2Q2010 and 20% in 3Q09.
  • Timeshare segment results of $37MM, which investors care about the least, happened to come in above MAR’s guidance and our expectations.  The outperformance came purely from better margins.  Top line was actually disappointing in our opinion.
    • Contract sales were down 7% YoY, sales & service revenue was down 5%, and base fee revenue was flat
    • However, timeshare sales and services, net margin was 25% - which was almost 400bps stronger than what MAR reported in 1H2010
  • Below the line items also helped the quarter.
    • As we expected, G&A came in lower than management’s guidance of $155MM – we modeled $150MM the actual number was $149MM.
    • Reported net interest expense of$37MM was $3MM lower than MAR’s guidance
    • Tax rate was 35% vs. guidance of 36%, adding another $1MM
    • The 3 items above added $10MM to MAR’s net income vs. their guidance.  These items were slightly offset by lower gains and equity earnings coming in at the low end of MAR’s guidance.
  • Bottom line:
    • Total revenues came in $44MM lower than our estimate. Actually, revenues were a little lower across every business.  However, timeshare margins were materially better, so operating income was only $14Mm lower than we estimated.  Lower G&A also helped.

Thoughts on 4Q/FY guidance

  • How does MAR’s FY 2010 guidance stack up to what they gave us last time?
    • MAR took up the low end of EBITDA guidance for FY2010 by $5MM but lowered the high end by $20MM
    • Gross room openings will now be 30,000 vs. prior guidance of at least 30,000
    • Timeshare GM guidance was reduced by $4MM at the low end of the guidance range to $201MM and by $9MM at the high end of the range to $206MM
    • MAR took up the low end of total fee guidance by $6MM while reducing the high end of the guidance range by $4MM
    • G&A guidance was reduced by $1-6MM
    • MAR took up the low end of their operating income guidance by $3MM but lowered the high end by $17MM
    • Guidance for gains and other income increased by $12MM
    • EPS guidance is now $1.09 to $1.12 compared to $1.05 - $1.13
  • So basically, most of the business’s top end results are projected to be below the prior high end of expectations, but the gain on the timeshare note sale is expected to be higher, G&A a little lower, and tax rate a little lower.
  • We’re not blown away by the guidance

THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - October 7, 2010

As we look at today’s set up for the S&P 500, the range is 17 points or -1.1% downside to 1147 and 0.3% upside to 1164. Equity futures are trading mixed to fair value in cautious pre market trading ahead of interest rate decisions in Europe and the start of the Q3 earnings season which sees Alcoa and Micron report after the close.  On the macro front, weekly Jobless Claims and Sep Chain Store sales are today's main highlight.

  • Horace Mann Educators (HMN) says CEO Louis Lower has resigned after being jailed for driving under the influence
  • Immucor (BLUD) cut FY 2011 EPS forecast to $1.08-$1.18, vs est. $1.28
  • InterMune (ITMN) sold worldwide devt., commercialization rights for dannoprevir drug to Roche for $175m
  • NeuStar (NSR) sees 3Q rev. $129m-$130m, vs est. $131.8m
  • Regeneron Pharmaceuticals (REGN) filed to sell 4.5m shares

SEPTEMBER RRETAIL SALES:

September comp sales - Retail Metrics estimates sales up. 2.3% in September vs. 1.1% last year and 3.5% in August.  Department store comp sales likely helped by cooler weather and back-to- school shopping.  Discounter’s (ex-WMT) expected to see biggest gain up 3.8%, followed by the Department stores up 3.1%; Specialty apparel up 1.2%; apparel up 1.1% and teen retailers up 0.5%.

PERFORMANCE

  • One day: Dow +0.21%, S&P (0.07%), Nasdaq (0.80%), Russell 2000 (0.58%)
  • Month/Quarter-to-date: Dow +1.66%, S&P +1.64%, Nasdaq +0.51%, Russell +1.36%
  • Year-to-date: Dow +5.17%, S&P +4.02%, Nasdaq +4.91%, Russell +9.58%

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -187 (-2089)
  • VOLUME: NYSE - 979.93 (-20.92%)  
  • SECTOR PERFORMANCE: Mixed performance (4 sectors were up on the day), but long live the reflation trade!!
  •  MARKET LEADING/LOOSING STOCKS YESTERDAY: Massey energy +6.09%, Canstellation +4.28% and CB Richard +3.11%/Citrix Systems -14.07%, Salesforce.com -7.87% and Red Hat -7.66%.
  • VIX: - 21.49 -1.24% - YTD PERFORMANCE - (-0.88%)
  • SPX PUT/CALL RATIO: - 1.43 from 1.16 +23.62%

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD - 17.91 0.406 (2.318%)
  • 3-MONTH T-BILL YIELD 0.13% +0.01%
  • YIELD CURVE - 2.03 from 2.09

COMMODITY/GROWTH EXPECTATION:

  • CRB: 289.15 +0.25%
  • Oil: 83.23 +0.50%
  • COPPER: 375.30 +0.71%
  • GOLD: 1,346.70 +0.48%

CURRENCIES:

  • EURO: 1.3925 +0.69%
  • DOLLAR: 77.386 -0.47%

OVERSEAS MARKETS:

 

Europe

  • European Markets: FTSE 100: 0.04%; DAX: 0.16%; CAC 40: 0.22%
  • European markets currently trade slightly in the green after being down early
  • The majority of sectors trade lower on the day with retail and industrial goods amongst the leading fallers. Basic resources and autos are amongst the gainers.
  • UK Sep Halifax House Price Index (3.6%) m/m vs consensus (0.2%) the largest monthly fall since records began, annual change +2.6% vs consensus +3.9%
  • UK Aug Manufacturing Production +6.0% y/y vs consensus +5.8% and prior revised +5.0%
  • UK Aug Industrial Production +4.2% y/y vs consensus +3.2% and prior +1.9%

Asian

  • Asian Markets: Nikkei (0.07%); Hang Seng +0.02%; Shanghai Composite closed
  • Asian markets were broadly lower as investors remain sidelined ahead of Friday's US jobs data and the reopening of China's markets.
  • The Nikkei opened lower but managed to finish the morning session in positive territory before falling back into negative territory during the afternoon session as the effects of the BOJ's rate decision couldn't stop the dollar from falling to a 15-year low against the yen Wednesday in the face of expected further Fed easing.
  • Australian job numbers came in ahead of expectations, adding 49,500 jobs in September vs expectations of 20,000, though the jobless rate remained 5.1% as expected.
  • Shanghai markets remain closed. 

Howard Penney

Managing Director


Early Look

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