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If you believe that the USA recession is all but over, the global crisis is winding down, China is not facing the dreaded hard landing, and future global growth will be led by the emerging markets, then Starwood Hotels & Resorts Worldwide, Inc. (NYSE:HOT) is an equity you should take a look at.

In addition to improved macroeconomic conditions impacting favorably upon HOT, there's a variety of other compelling reasons why HOT is well positioned to pleasantly surprise and reward shareholders in the coming years. I believe it will easily exceed its five-year growth rate of 2.75%, increase its dividend payments, and build greater shareholder value. However, any decision to add HOT to one's portfolio should be tempered by giving consideration to a possible near-term market correction.

Company Overview

HOT, one of the world's largest hotel and leisure companies, operates a collection of iconic brands primarily in the luxury and upscale segment of the lodging industry. Its diversified brand portfolio includes: Sheraton , Four Points, Westin, Le Méridien St. Regis , Aloft, ElementSM and The Luxury Collection.

Currently, HOT's portfolio consists of 1,128 hotel properties with approximately 322,300 guest rooms. These properties are located in some 100 different countries, and it's interesting to note that more of them are located outside the USA than inside. The ownership/managerial status of the properties are as follows:

  • 59 hotels are owned, leased or in which HOT has a majority equity interest
  • 530 hotels are managed by HOT on behalf of third-party owners
  • 539 hotels are franchised and HOT earns franchise fees and royalties.

A Decade Low Leverage Ratio

Following the global economic crisis, HOT's management made a wise decision to deleverage and modify the business model. In the October 25, 2012, conference call with investors and analysts, Chief Executive Officer Frits van Paasschen stated: "We've reduced the inherent risk in our business model. The fee business is far less volatile."

Through selling hotels, paying off debt and restructuring it's portfolio of hotel properties, HOT has dramatically improved its debt-to-equity ratio. At September 30, 2012, it stood at a very conservative, decade low, of .61, which is down from its March, 2009 high of 2.49.

In just three hotel sale transactions, it generated more than one-half billion dollars in cash, which was used to pay down debt. Proceeds from the hotel sales were as follows: The NYC Manhattan at Times Square Hotel ($275 Million), the "W" property in Los Angels ($125 Million) and the "W" property Chicago-Lakeshore ($126 Million).

As a result of restructuring its portfolios by opting for management agreements and franchises instead of ownership and operations, the company projects that 65% of its future earnings will be generated from fees, which are more predictable and less risky compared with hotel operations.

Rating Agency Upgrade

The hotel sales put Starwood in a better position with the rating companies to weather any future potential downturn amid slowing global growth or a potential U.S. recession. For example, in March, 2012, Moody's Investors Service upgraded its rating on HOT citing "Improved performance and lower debt." The rating agency noted that HOT had steadily increased its occupancy and cut its debt, which would drive improved earnings, liquidity and credit measures.

Growth In Mid-Market Brands

HOT's Mid-Market, "Specialty Select" brands of Four Points , Aloft and Element(NYSE:SM) are success stories for the company and its developed an accelerated expansion program for these brands. For developers and franchisees, these mid-market brands are especially attractive because of their popularity, market segment positioning and their flexible development options and cost efficient operating models.

Growth projections include 120+ Four Points to be operating in North America by the end of 2013 and some 190 to be operating globally. Aloft, which as grown 67% over the past three years is expected to grow some 25% in 2013. Element(SM), the Eco-Friendly brand, was just introduced in 2012. Based upon the great success of the prototypes, HOT is developing an aggressive expansion for the brand.

Doubling Its Presence in Russia and CIS

In August of 2012 HOT announced that it expected to expand its portfolio of hotel properties throughout Russia and the Commonwealth of Independent States Its growth plans include promoting the Aloft brand, which will result in doubling its portfolio in the region over the next three years. Since Russia, along with China has one of the world's highest travel growth rates, it would appear that HOT's Aloft Russian initiative is a good one.

The # 1 Leader in China & 90 New Hotels In the Pipeline

HOT has a significantly larger footprint in China than any of its competitors since its pioneering of China goes back to 1985 when it opened The Great Wall Sheraton Hotel in Beijing, which was the first international branded hotel in the People's Republic of China.

It currently has more than 70 existing hotels and a pipeline of over 90 new hotels. In fact, China is now HOT's second-largest hotel market in the world, and it's a good place to be considering China's growth rate. Commenting on its China growth strategy, Frits van Paasschen, President and CEO of HOT, summed it up by stating: "China is one of the world's fastest growing domestic and outbound travel markets. In fact, Beijing Capital International Airport is now the world's second busiest airport, with more passengers than Chicago O'Hare or London Heathrow,"

Hot Significant Metrics


MetricFactor/Number
Closing Price 1/25/2013$60.89
PE Ratio23.24
Annual Dividend Per Share$1.25
Next Ex-Dividend Date12/12/13
Effective Yield2.05%
52 Week High$61.09
52 Week Low$47.41
Beta2.02
5 Year Growth Rate2.75%
Current Year Est. EPS$2.63
Next Year Est. EPS$2.96
Compiled by Craig Van Pelt
SOURCE: Scottrade



HOT - Dividend History
YearCash Amount
2012$1.25
2011$0.50
2010$0.30
2009$0.20


HOT - Analyst Recommendations
RatingCurrent1 Month Ago2 Months Ago
Strong Buy121312
Moderate Buy122
Hold988
Moderate Sell000
Strong Sell000

Caution: How the Stock Has Gyrated

Notwithstanding all of the forward looking events, which will positively impact the stock, prospective buyers of HOT should be VERY cautious over the prospects of a near-term market correction and how HOT will move. HOT is quite volatile with its relatively high beta of 2.02, and historically it has moved quite dramatically, and very much in tandem with the market.

For example, the shares of HOT, like others in its sector, were hit hard during the global financial crisis of 2007-2008 when it dropped from around $75.00 per share to an unbelievable $10.00 as it appeared the world was coming to an end.

In the 2011 market correction of February to October, HOT again moved in tandem with the market and dropped from around $65 per share to a low of around $37. Then, following the overall market rally from October to March, 2012, it moved back to the $60.00 range. During the past 10 months, it's been trending up, moving from $50.00 to $60.00.and closing 1/25/2013 at $60.89. Lastly, this 1/25/2013 closing price is within pennies of the High Target Price of Analysts.

Conclusion

Clearly, there's a number of compelling reasons to own HOT for both capital appreciation and dividends. The company appears to be doing everything right. As discussed above, its presence in the major global growth markets should guarantee its own growth. It's financially strong, and management has taken steps to further insulate the company from future macroeconomic weaknesses.

The long-term prospects of HOT are very positive. I'm a buyer of HOT, but ONLY after the market dips from its current levels and takes HOT down with it.

Source: Starwood Hotels & Resorts - Poised For Big Growth, But Buy On A Dip