Economic statistics seem to be confirming the suspicion many have had that the “economic recovery” was merely a reprieve from a drawn-out process of deleveraging and structural changes – a much needed process after decades of ever increasing consumer spending on the back of easy credit and rising asset prices. This reprieve was created by stimulative measures taken by the government and the Federal Reserve, who now both seem low on ammunition.
Among many consumer cyclical stocks that look vulnerable is Starwood Hotels & Resorts Worldwide Inc. (HOT). This company touts an inexplicably high valuation and I believe another contraction in consumer spending will provide the catalyst to take its stock price down significantly.
Starwood owns, manages, and franchises hotels and resorts all over the world. It mainly operates in the high to very high end under such well-known names as Sheraton, Westin, St. Regis, and W.
Starwood suffered a 17% drop in revenues in 2009, but rebounded somewhat in the first half of 2010 with a roughly 8% growth from the previous year’s depressed revenues. This rebound happened as government stimulus was peaking and talk of a recovery was widely heard.
It should hardly come as a surprise if growth stalls again in coming quarters, but the viability of Starwood as a short is not contingent on revenues contracting again, or even stagnating. In 2010, the company expects to earn between 93 cents and $1.05 per share for the full year. That translates into a forward P/E of roughly 47. Granted, a case can be made for an economic rebound and Starwood’s strong project pipeline in Asia should fuel some growth. But this is a company which has shown neither a consistent trend of rising revenues nor earnings in the last decade. Even with peaking revenues in 2007, diluted earnings per share only amounted to $2.57. A return to that level of profitability, which is hard to see on the horizon, would still imply a P/E of 18. Looking at free cash flows or other metrics does not change this story. Starwood is not a high growth company, but it is priced like one.
Disclosure: Author is short HOT shares.