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As the summer vacation season approaches, investors might turn their thoughts to the hotel industry for potential investment ideas. The hotel and motel industry can be highly variable. While consumers are well aware of the various brands, they might not realize that the individual companies own numerous brands. The decision between Days Inn, Travelodge and Ramada in some ways is irrelevant since some portion of the revenue will flow up to Wyndham Worldwide Corp. (NYSE:WYN) regardless of the consumer's decision.

Varying business models make comparisons difficult

This brings up a second key point to thinking about hotels as investments. "Hotel" companies often own and operate only a certain percentage of the actual properties under one of their brands. Some companies also manage properties that they do not own. Hotel companies often franchise the brand in much the same way that there are McDonald's (NYSE:MCD) franchises. The Marcus Corporation (NYSE:MCS) is an owner/operator of several different brands even from different parent companies. Orient-Express Hotels, Ltd. (OEH) is an exception in that it owns and operates all 50 properties (including trains and other assets) that fall under its brand name. It also appears that some companies are doing a better job of recovering from the Great Recession than other companies. I'll take a look at the following companies:

Hotel Companies
TickerNameMarket Capitalization ($ Millions)Fiscal 2010 Revenue ($ millions)Year End
MARMarriott International12,44111,691December
HOTStarwood Hotels & Resorts Worldwide, Inc.10,6865,071December
IHGIntercontinental Hotels Group plc5,7181,628December
WYNWyndham Worldwide Corp5,4603,851December
HHyatt Hotels Corporation6,8603,527December
HMINHome Inns & Hotels Management Inc. (Chinese)1,419452December
OEHOrient-Express Hotels, Ltd.1,034572December
SVN7 Days Group Holdings Limited (Chinese)862227December
MCSThe Marcus Corporation292379May

Source: Data provided by Zacks.com services for Market Cap. Revenue figures pulled from Yahoo!Finance. H market cap is from Yahoo Finance.

The above list includes two Chinese companies that appear to primarily operate in China. There was a third company, China Lodging Group, Ltd (NASDAQ:HTHT) that lacked financial statement information in Yahoo Finance, which led to its exclusion. This list also excludes micro-cap companies like Great Wolf Resorts (NASDAQ:WOLF) and Sonesta International Hotels Corp. (NASDAQ:SNSTA). WOLF is more of a resort company and operates water parks. This list also excludes casino companies such as Wynn Resorts Ltd. (NASDAQ:WYNN), which actually has a market capitalization greater than any of the companies listed despite only $4.2 billion in 2010 revenue. The immediate observation is that the Chinese companies seem to have high market capitalizations relative to revenue; however, the more valid comparison is to look at enterprise value.

Hotel Company Enterprise Values

TickerMarket Capitalization ($ Millions)Debt ($ Millions)Cash ($ Millions)Enterprise ValueLeverage % Net Debt to EV
MAR12,4412,86014415,15717.9%
HOT10,6863,31067513,32119.8%
WYN5,4603,8101759,09540.0%
IHG5,718892596,55112.7%
H6,8607681,6605,968-14.9%
OEH1,0347551171,67238.2%
HMIN1,4192103531,276-11.2%
SVN862353812-6.2%
MCS2922231050542.2%
Source: Yahoo!Finance and market caps provided by Zacks.com services except for H.

Many brands, fewer companies

In order to help familiarize investors, I've also included the following table that details the different brands that fall under these hotel companies.

Hotel Brands

TickerBrands
MARMarriott Hotels & Resorts, JW Marriott Hotels & Resorts, Renaissance, EDITION, Autograph Collection, Courtyard by Marriott, AC Hotels, Residence Inn, Fairfield Inn & Suites, TownePlace Suites, SpringHill Suites, Ritz-Carlton, ExecuStay, Grand Residences
HOTSheraton, FourPoints, W Hotels, Aloft, The Luxury Collection, Meridian, Element, Westin, St. Regis
IHGInterContinental Hotels & Resorts, Crowne Plaza, Hotel Indigo, Holiday Inn, Staybridge Suites, Candlewood Suites
WYNWyndham Hotels and Resorts, Wyndham Garden, TRYP, Wingate, Hawthorn, planet hollywood, Dream Hotels, Night, Ramada, Days Inn, Super 8, Baymont Inn & Suites, Microtel, Howard Johnson, Travelodge, Knights Inn
HHyatt, Park Hyatt, Grand Hyatt, Andaz, Hyatt Regency, Summerfield Suites
OEHOrient-Express, Individually branded hotels including Cipriani Hotel in Venice, 21 in New York City, and The Observatory Hotel in Sydney.
MCSPfister Hotel, Skirvin Hotel, (manages other brands)
Hilton Worldwide (private)Conrad Hotels, Waldorf-Astoria, Hilton Hotels & Resorts, Doubletree, Embassy Suites, Hilton Garden Inn, Hampton Inn, Homewood Suites, Home2 Suites, Hampton Inn & Suites
Source: Company websites, wikipedia. Also included is Hilton, which was recently acquired by the The Blackstone Group (NYSE:BX)

Scale matters

The following data seems to suggest pretty strongly that scale matters. It is also critical to look closely at the business model, since MAR and HOT both have comparable levels of assets and net incomes, but very different revenues (business model) and ROEs (book leverage).

Key 2010 Financial Data ($ Millions)

TickerRevenueOperating IncomeOperating MarginNet IncomeAssets ROAROE
MAR11,6916956%4588,9835%34%
HOT5,07160012%4779,7765%22%
WYN3,85171819%3799,4164%14%
IHG1,62843727%2802,78510%133%
H3,527642%667,2431%1%
OEH572(12)-2%-632,138-3%-6%
MCS379369%167042%5%
SVN2272310%183196%9%
HMIN4528018%558028%15%

Source: Yahoo Finance, SEC Filings. ROA is calculated as Net Income to Average of 2009 and 2010 year end assets. ROE is calculated to average book equity for year end 2010 and 2009.

The Chinese companies also show promising ROAs and ROEs; however, we'll see that valuation is a concern.

Digging deeper into individual stocks
Data in company snapshots is provided by Zacks.com services and from Yahoo Finance for operating cashflow, debt level, and cash level.

Marriott International has a market capitalization of $12.4 billion. MAR closed recently at $33.15 per share with a dividend yield of 1.16 percent. MAR has an enterprise value of $15.2 billion and shows some financial leverage. MAR shows a trailing P/E ratio of 29.3x, which decreases compared to its forward P/E, which is 24.5x. This suggests some earnings per share growth. Its low debt level should not be a challenge. MAR just closed at $33.15 per share, which is 13.3% above its 52-week low of $29.25 and 28.3% below its 52-week high of $42.54 per share. MAR has a high valuation at 16.7x by Enterprise to EBITDA measures. MAR has a low price to sales ratio at 1.1x. On an operating cash flow basis, MAR appears to have little upside improvement with an EV to OCF multiple of 13.4x.

HOT has a market capitalization of $10.7 billion. HOT closed recently at $51.88 per share with a dividend yield of 0.55 percent. HOT has an enterprise value of $13.3 billion and shows some financial leverage. HOT shows a trailing P/E ratio of 38.6x, which decreases compared to its forward P/E, which is 32.1x. This suggests some earnings per share growth. Its modest debt level appears to be manageable. HOT just closed at $51.88 per share, which is 27.1% above its 52-week low of $40.82 and 25.5% below its 52-week high of $65.09 per share. HOT has a high valuation at 16.9x by Enterprise to EBITDA measures. HOT has a low price to sales ratio at 2.1x. On an operating cash flow basis, HOT appears to be highly valued with an EV to OCF multiple of 18x.

WYN has a market capitalization of $5.5 billion. WYN closed recently at $31.57 per share with a dividend yield of 1.87 percent. WYN has an enterprise value of $9.1 billion and shows a fair bit of financial leverage. WYN shows a trailing P/E ratio of 15.4x, which decreases compared to its forward P/E, which is 14.2x. This suggests mild earnings per share growth. Its modest debt level appears to be manageable. WYN just closed at $31.57 per share, which is 56.9% above its 52-week low of $20.12 and 10.8% below its 52-week high of $34.97 per share. WYN has a medium valuation at 10.1x by Enterprise to EBITDA measures. WYN has a low price to sales ratio at 1.4x. On an operating cash flow basis, WYN appears to have little upside improvement with an EV to OCF multiple of 13.8x.

IHG has a market capitalization of $5.7 billion. IHG closed recently at $18.83 per share with a dividend yield of 2.34 percent. IHG has an enterprise value of $6.6 billion and shows some financial leverage. Its low debt level should not be a challenge. IHG just closed at $18.83 per share, which is 23.6% above its 52-week low of $15.24 and 23.6% below its 52-week high of $23.28 per share. IHG has a medium valuation at 11.8x by Enterprise to EBITDA measures. IHG has a medium price to sales ratio at 3.5x. On an operating cash flow basis, IHG appears to have little upside improvement with an EV to OCF multiple of 15.2x.

H has a market capitalization of $6.9 billion. H closed recently at $39.45 per share. H has an enterprise value of $6 billion and shows negative financial leverage. H shows a trailing P/E ratio of 120.9x, which decreases compared to its forward P/E, which is 88.8x. This suggests strong earnings per share growth. However, the overall low ratio suggests challenges ahead. Its low debt level should not be a challenge. H just closed at $39.45 per share, which is 12.8% above its 52-week low of $34.98 and 25.7% below its 52-week high of $49.57 per share. H has a somewhat high valuation at 14.2x by Enterprise to EBITDA measures. H has a low price to sales ratio at 1.9x. On an operating cash flow basis, H appears to have little upside improvement with an EV to OCF multiple of 13.9x. H is also a good example of the different business models that can be approached. At December 2010, its worldwide portfolio consisted of 453 properties with 120 properties effectively owned and managed by H; 177 properties managed by H but owned by third parties; an additional 24 properties managed by H but owned by unconsolidated entities; and 132 properties that are franchised and neither owned nor operated by H, just branded.

OEH has a market capitalization of $1,033.9 million. OEH closed recently at $9.78 per share. OEH has an enterprise value of $1672 million and shows a fair bit of financial leverage. Its modest debt level appears to be manageable. OEH just closed at $9.78 per share, which is 38.7% above its 52-week low of $7.05 and 43.8% below its 52-week high of $14.06 per share. OEH has a high valuation at 23.2x by Enterprise to EBITDA measures. OEH has a low price to sales ratio at 1.8x. On an operating cash flow basis, OEH appears to be possibly overpriced with an EV to OCF multiple of 36.3x.

HMIN has a market capitalization of $1,418.9 million. HMIN closed recently at $33.62 per share. HMIN has an enterprise value of $1276 million and shows negative financial leverage. HMIN shows a trailing P/E ratio of 47.1x, which decreases compared to its forward P/E, which is 35.9x. This suggests strong earnings per share growth. Its low debt level should not be a challenge. HMIN just closed at $33.62 per share, which is 3.3% above its 52-week low of $32.55 and 59.6% below its 52-week high of $53.66 per share. HMIN has a medium valuation at 10.2x by Enterprise to EBITDA measures. HMIN has a medium price to sales ratio at 3.1x. On an operating cash flow basis, HMIN appears to have little upside improvement with an EV to OCF multiple of 11.6x.

SVN has a market capitalization of $862 million. SVN closed recently at $16.88 per share. SVN has an enterprise value of $812 million and shows negative financial leverage. SVN shows a trailing P/E ratio of 59.6x, which decreases compared to its forward P/E, which is 32.6x. This suggests strong earnings per share growth. Its low debt level should not be a challenge. SVN just closed at $16.88 per share which is 65% above its 52-week low of $10.23 and 47.9% below its 52-week high of $24.97 per share. SVN has a somewhat high valuation at 15.9x by Enterprise to EBITDA measures. SVN has a medium price to sales ratio at 3.8x. On an operating cash flow basis, SVN appears to be highly valued with an EV to OCF multiple of 18x.

MCS has a market capitalization of $292.2 million. MCS closed recently at $9.89 per share with a dividend yield of 3.46 percent. MCS has an enterprise value of $505 million and shows a fair bit of financial leverage. MCS shows a trailing P/E ratio of 22.3x, which decreases compared to its forward P/E, which is 16x. This suggests strong earnings per share growth. Its modest debt level appears to be manageable. MCS just closed at $9.89 per share which is 12.9% above its 52-week low of $8.76 and 47% below its 52-week high of $14.54 per share. MCS has a low valuation at 7.3x by Enterprise to EBITDA measures. MCS has a very low price to sales ratio at 0.8x. On an operating cash flow basis, MCS appears to be a good value with upside with an EV to OCF multiple of 9.7x.

Conclusion

This "quick" survey of hotel companies has provided me with some thoughts on investment opportunities and approaches. It should be noted that additional fundamental research should be completed prior to making any investment decision.

  1. Long Value: MCS, WYN and H all appear to have low valuations on an EV to EBITDA and EV to OCF basis. However, only WYN shows comparable asset returns to HOT and MAR. WYN also offers an attractive dividend yield at 1.87%.
  2. Dividend Investors: MCS offers consistent and attractive dividends; recent history shows $0.085 per share per quarter giving about a 3.5% yield. MCS also carries very reasonable valuation metrics. The downside is its higher leverage and smaller scale. WYN received the nod to be the long value play largely on the basis of superior ROA and ROE and larger scale.
  3. Turnaround bet: OEH could be a turnaround opportunity in the near future. Based on Yahoo Finance data, it is already trading near liquidation values and has a price to book ratio of 1.0x. OEH owns substantial assets scattered about the world; perhaps the sum of the parts would be greater than the whole. However, OEH has posted negative net income form 2006 to 2010 but usually has positive operating cash flow. OEH is also substantially off of its 52-week low, suggesting that some investors have already bet on a turnaround. H could also fall into this category. Net Income has significantly deteriorated in the last couple years. H carries the lowest price to book value of all the companies reviewed.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in OEH, MCS over the next 72 hours.

Source: Surveying Hotel Companies for Investment Opportunities