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Summary

  • The result of Marriott’s recent quarter shows its dominant presence in the industry. The top line improved by 7% and the profit grew by 25%.
  • Costs should become controllable as the development contracts come to an end.
  • Expanding and developing a larger distribution base will drive sales in the future. The growth is justified since revenue per room is rising.
  • Technology implementation is still underway. Check-in through app will push the growth momentum further.

In search of popular stocks, investors sometime miss out what the less popular companies offer. One such company is Marriott International (NASDAQ:MAR). Marriott's stock value has gone up by 71% in one year. Yet, I believe it is undervalued and holds further potential for growth. The company is on an expansion spree and has recently moved into establishing golf resorts. It is also benefiting from the growing demand of hotel accommodation from US corporate travelers. These, and other factors, hold the future of Marriott in their hand.

In this article, I will go through Marriott's performance in its recent quarter. After which I will discuss the future potential of the company.

Second Quarter

During the period, Marriott's total revenue increased by 7% to $3.5 billion, as compared to the same quarter in 2013. Worldwide comparable revenue per room available "REVPAR", a key industry measure of performance, went up by 5.8% and average daily rate increased by 3.5%. This rate charge was higher than the rival, Choice Hotels (NYSE:CHH), whose daily rate went up by 2.9% in its latest quarter.

These figures show that Marriott is growing, not just by building more hotels, but by taking more revenue from each hotel room that it builds.

Total operating costs also increased but at a lesser rate than the revenue. The 6% hike in expenses failed to bring any material impact on operating profit which improved by a massive 13%. A lot of these costs relate to the expansion Marriott is going through. Development of hotels and support services require capital outflow which sometimes has to cross through the income statement. In the future, more benefit will come through the lower development cost of the projects as Marriott will be completing the contracts it is currently involved in.

The company delivered an adjusted-earnings figure of 71 cents, which was 25% higher than the same quarter in 2013. This has become possible only due to the expansion the company is currently doing. In recent years, Marriott has accelerated its efforts to expand its distribution network. For this, the company has decentralized its development business. Additionally, it has opened local development offices to get closer to the markets and customers. Since 2009, Marriott has increased its number of developers and support staff globally by more than 35%.

A broader distribution not only drives sales, but also allows the company to make better use of its marketing resources, more importantly through the frequent traveler program. By providing customers with greater choice wherever they choose to travel, Marriott draws out higher room bookings. This drives profit and, in turn, results in higher shareholder value.

Up till now in 2014, Marriott has opened 25,000 rooms worldwide, much more than 11,000 rooms it opened in the previous year. The company signed contracts for 46,000 rooms in the first half of this year, almost double the number as compared to the past year.

I wouldn't be happy with an expansion if it fails to improve revenue per room. However, this hasn't been the case with Marriott as both daily rate and REVPAR growth has been constructive. Therefore, this expansion is justified.

Moreover, the company is also making better use of technological advancement just like its competitor, Choice. It has introduced Marriott mobile app for tablets and smart phones. The app has booked over $1.6 billion of mobile reservations in the last 12 months. Online check-in and checkout via mobile is only available at 1,000 of the company's hotels at present, and the extension to more than 4,000 hotels by the year end should help in driving sales growth further in the future.

Bottom Line

Undoubtedly, the management at Marriott is to be credited for the growth story of the company. The company has made some really clever moves. It has solidified its leadership in North America with the acquisition of Gaylord, and also became the leader in Sub-Saharan Africa with the addition of Protea. Also, the decentralization approach has allowed it to grow faster and be more responsive to the customers than its peers.

With similar strategies designed for the rest of the markets, Marriott is a pro player in the hospitality sector. The company's net growth for the past three years has increased by 11% on average. If this is compared to its peers, it is seen that they have experienced a shrink in their profits with a growth rate of negative 9.6%. The present price-to-earnings ratio also points toward the undervalued status of the company. With different hotel brands under one roof, all bringing profit to Marriott only, the branding strategy is also a good move to drive up sales.

Costs have not been a major worry for the company and therefore, improving top line is a major factor towards achieving greater profitability. And this is what Marriott has been doing successfully. For all these reasons, the company is a good investment to consider; it holds a buy rating.

Source: Don't Ignore The Return Potential Of Marriott