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UBS downgraded Four Seasons (NYSE:FS) yesterday, shortly after the company came out with Q1 06 earnings for the period ending March 31. It was a mistake.

Revenue was down from $63.1 million a year ago to $57.6 million, but last year's numbers included ownership of The Pierre in New York. Hotel ownership revenue dropped from $20.5 million last year to $5 million in 2006. The company guided that hotel management fees should grow 15% for the full-year 2006.

Margins in the company's hotel management business improved from 55.2% to 60.1%, with total management fees rising to $30.4 from $24.7 million. Apparently, owning hotels is not such a great deal because net earnings for the company rose to $13.4 million from $5.2 million. Quite a performance. The company's cash and equivalents rose to $245.3 million from $242.2 million on December 31, 2005.

Four Seasons has done a good job of restructuring its business, which has had $248 million in total revenue over the last four quarters. In the early part of this period, the company was showing substantial net losses, but that has changed to positive numbers the last two quarters. The company attributes improvements in its business to both higher room rates and improved occupancy.

Four Seasons has opened properties recently in Palo Alto, Geneva, Hong Kong and Thailand. According to the company's CEO these new locations are experiencing "immediate critical acclaim and a strong positive customer response, which further enhances the Four Seasons brand."

As the demand for high-end hotels increases with the rise in global business travel, there are only a few properties in each city that suit the needs of these travelers. For example, the only Mobil 5 Star Hotel in San Francisco is the Four Seasons. The Travel+Leisure list of the best hotels in the United States is dominated by Four Seasons and Ritz-Carlton. The lists for Europe and Asia also have more than their fair share of Four Seasons properties.

The point is that companies cannot buy this kind of public relations or credibility. It has to come from the operating excellence of the properties and the company's management.

Four Seasons trades at $66.50 on a 52-week high/low of $75.22/$46.85. You can't get a bargain at the hotels, but you may be able to get one on the stock.

FS 1-yr chart:

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He is also the former president of Switchboard.com, which was the 10th most visited site in the world at the time, according to MediaMetrix. He has been chief executive of FutureSource LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about. He can be reached at douglasamcintyre@gmail.com.

Source: Four Seasons: Can't Buy Me Love (FS)