Sleeping Well At Night With Hotel Stocks

Includes: BEL, H, MAR, MCS, SPY, WYN
by: Bennington Investment Ideas

About 18 months ago, I reviewed several hotel stocks in an article. For long investors, I suggested Wyndham Worldwide Corp. (NYSE:WYN) due to its strong asset return performance, good dividend yield and other attributes. I also suggested The Marcus Corporation (NYSE:MCS) for dividend investors. In 2012, MCS paid $0.34 in dividends, excluding what appears to be a special $1.17 December dividend. For a little more risk, I suggested Orient-Express Hotels, Ltd. (OEH) as a possible turn around opportunity. This article will revisit those suggestions and see how they performed. The following table revisits the performance of those stocks.

Hotel Stock Performance

Ticker Name Closing Price 6/20/2011 Closing Price 1/7/2013 Dividends Total Return
WYN Wyndham Worldwide Corp 31.93 56.00 0.91 78%
MCS The Marcus Corporation 10.00 13.12 1.32 44%
OEH Orient-Express Hotels, Ltd. 9.86 11.50 0 17%
MAR Marriott International 33.12 39.01 2.54 25%
HOT Starwood Hotels & Resorts Worldwide, Inc. 52.16 59.64 1.74 18%
H Hyatt Hotels Corporation 39.46 39.28 0 0%
SPY SPDR S&P 500 Trust ETF 127.05 145.97 4.18 18%

Source: Yahoo!Finance, Author calculations.

This table shows that several recommendations performed quite well, even outperforming the broader market. WYN and MCS substantially outperformed the SPDR S&P 500 Trust ETF (NYSEARCA:SPY). Hyatt Hotels Corp. (NYSE:H) was the only company that did not deliver a comparable or better return than the market.

However, some of these companies, back in 2011, were riskier than others. As noted in my previous article, there were differences in leverage and different exposures to the broader market. The capital asset pricing model provides a framework for evaluating market risk exposure through the concept of beta. SPY has a beta of 1. Some other companies have betas of 1 too. Some companies have betas below 1, suggesting that they have less systematic risk. Other companies, like MCS, have betas above 1, suggesting greater risks. The following table compares the current betas of these stocks.

Excess Returns

Ticker Beta Actual Total Return Systematic Risk Return Excess Return
WYN 1.6 78% 29% 49%
MCS 1.2 44% 22% 23%
OEH 2.6 17% 47% -31%
MAR 1.4 25% 25% 1%
HOT 2.0 18% 37% -19%
H 1.3 0% 23% -24%
SPY 1.0 18% 18% 0%

Source: Yahoo!Finance, Author calculations. Numbers will not add due to some rounding.

This table uses the beta to adjust for the return that should have been achieved based solely on systematic risk exposure. It should be noted though that the betas applied are current betas and not the beta from June 2011, which might have been different. However, it is also possible that the beta changed over time from June 2011 to today. By definition, SPY has no excess return. While OEH had a return near market, its excess return was negative - this stems from the fact that it has quite a high beta. Marriott International (NYSE:MAR) had an excess return of 1% meaning that it essentially achieved its expected return based on systematic risk. However, both WYN and MCS have delivered substantial excess returns.

This is great if you have been in these stocks, but what might happen going forward? The following table compares some metrics for these companies from June 2011 to their corresponding values today. The following table looks at annual revenue and operating margins.

Financial Metrics

Ticker 2010 Revenue TTM Revenue % Change 2010 Operating Margin TTM Operating Margin Change
MAR 11,691 11,750 0.5% 6% 2% -4%
HOT 5,071 6,320 24.6% 12% 14% 2%
WYN 3,851 4,440 15.3% 19% 19% 0%
H 3,527 3,940 11.7% 2% 4% 2%
OEH 572 578 1.0% -2% 7% 9%
MCS 379 419 10.4% 9% 11% 2%

Source: Yahoo!Finance, Author calculations

This table shows that some companies have improved while others have declined. Revenue growth was positive for all companies, but just marginal for OEH and MAR.

Return Metrics

Ticker 2010 ROA TTM ROA Change 2010 ROE TTM ROE Change
MAR 5% 10% 5% 34% na na
HOT 5% 6% 1% 22% 18% -4%
WYN 4% 6% 2% 14% 17% 3%
H 1% 1% 0% 1% 3% 2%
OEH -3% 1% 4% -6% -2% 4%
MCS 2% 4% 2% 5% 7% 2%

Source: Yahoo!Finance, Author calculations

ROE (return on equity) and ROA (return on assets) metrics showed more consistent improvement with the exceptions of MAR which has negative book equity and Starwood Hotels & Resorts Worldwide, Inc. (HOT) which posted a decline in ROE despite a slightly better ROA.

However, these financial metrics don't provide any insights into value. Are any of these companies good values for investors? WYN, with a strong performance over the past 18 months, might have a stock price that has run ahead of the underlying financials. The following table compares forward P/E ratios from June 2011 to today.

Forward P/E

Ticker June 2011 Forward P/E Current Forward P/E
MAR 25x 19x
HOT 32x 23x
WYN 14x 15x
H 89x 52x
OEH na 44x
MCS 16x 14x

Source: Yahoo!Finance

These ratios, except for WYN and MCS, are relatively high when compared to the broader market. This suggests that WYN and MCS would continue to be reasonable opportunities for investors. Both offer attractive dividends. However, it would be necessary to do additional analysis prior to making any investment decision. For example, one would want to consider other valuation metrics, including cash flow based metrics. More broadly as the economy continues to improve business and leisure travelers should continue to use hotels, driving revenue growth.

Disclosure: I am long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.