Marriott International: Share Buybacks, High Short Ratio, Cheap Valuations Warrant Upside

| About: Marriott International, (MAR)

Marriott International, Inc. (NYSE:MAR) operates in the hospitality industry and basically provides lodgings worldwide. The 15 brand names under the company include the Ritz-Carlton, Marriott, Bulgari, Residence Inn and The Autograph Collection, among others. Marriott International's last quarterly results met analyst expectations; the stock is up 38% YTD and is trading at its 52-week high. We think there is room for further appreciation, given the future growth opportunities and share repurchase activity. We recommend buying Marriott International.

Financial Performance

The company posted healthy results for 2Q2012. EPS of $0.42/share was in the upper half of the guidance issued earlier this year (i.e. $0.39-to-$0.43/share). It was also in line with what analysts had expected, and increased by 24% YoY from $0.37/share. Revenues were down from last year, but met analyst expectations of $2.8 billion.

Worldwide REVPAR (revenue per available room) increased by 6.7%. The economic situation in Europe has forced the exchange rate to move in favor of other countries like the United States, Russia and China. Tourists from these countries now make their way to Europe, which is a popular tourist destination, at less expenditure. The main drivers for revenue in Q2 were the Asia Pacific, and the Middle East & Africa regions.

REVPAR was up 11.1% because of a strong economy in the last quarter in Asia Pacific. The international luxury segment, including Bulgari Hotels and the Ritz-Carlton (outside the U.S. and Canada), is also going well with a REVPAR increase of 11.3% (QoQ in constant dollar terms). The company expects continued strong REVPAR and room growth rate in North America in the second half of the year.

In 2Q2012, 8,000 rooms were added. Construction delays in the Middle East, Asia and Mexico have pushed some openings to 2013. Around 115,000 rooms were in the pipeline as at the end of 2Q2012. The 115,000 figure does not include the acquisition of Gaylord, which is pending. The 2012-to-2014 period is expected to be witness to 90,000-to-105,000 room openings.

According to STR Global, the results for the month of August were positive for the Middle East and Africa regions, as well as for the Americas, on all three performance measures (occupancy rate, average daily rate and REVPAR). REVPAR was up 15.3% for MEA and 6.7% for America for the month of August. Europe and Asia Pacific showed marginal increases in REVPAR.

The slowdown might hurt Marriott International because Asia is a significant contributor to MAR revenues. Meanwhile, Luxury and upscale showed the greatest increase in REVPAR because of increased traffic. Nomura securities said the U.S. REVPAR is expected to continue to increase in the second half of the year.

The company has debt of $2.56 billion. The interest coverage ratio of almost 6 shows that the company's earnings can easily cover interest payments. The operating cash flow is $1.02 billion (trailing twelve months) and the company's cash balance stands at $105 million.

The company engages in stock repurchase in addition to paying dividends. The company's dividend yield is 1.3%, with a payout ratio of 69%. The company has been increasing its dividends every year since 2010. The free cash flow yield is 3.8% (trailing twelve months), which means that dividends are sustainable, and there is room for growth.

YTD, the company has repurchased 14.7 million shares worth $550 million; 25.8 million shares remain under the current share repurchase authorization. Despite the $210 million planned Gaylord investment, the company expects to return $1 billion to shareholders this year through share buybacks and dividends.

Future Guidance

For 3Q2012 and the second half of 2012, the company expects REVPAR to be up by 6%-8% worldwide, 6%-8% in North America, and 5%-7% outside North America. The full-year fee revenues guidance range is $1,410-$1,440 million (8%-10% growth over last year).

EPS guidance for Q32012 is $0.39-$0.41, while analysts expect $0.4/share. Last year in Q3, EPS was $0.29/share. EPS guidance for the full year is 1.65-$1.75/year, which is 24%-31% more than last year. The Street expects $1.69/share.

The picture below is a summary of the guidance issued in the press release:

Click to enlarge


Marriott has forward P/E of 20x, while its last 5-year average P/E is 37x.

InterContinental Hotels Group PLC (NYSE:IHG) has forward P/E of 17.6x, Hyatt Hotels Corporation (NYSE:H) has forward P/E of 44x, and Host Hotels & Resorts, Inc. (NYSE:HST) has a forward P/E multiple of 13x. Starwood Hotel & Resorts Worldwide, Inc. (HOT) trades at a forward P/E of 21x. The average forward P/E of these peers is 24x. Below are MAR's valuations based on EPS estimates, and its own forward as well as peer average multiple:

*2014 EPS is calculated by applying long term growth rate of 22% to 2013 earnings. The EPS estimates might be higher after more buybacks.

The company has a short ratio of 9.2 days, while its financial outlook is not bad as well. Strong buyback activity can signal that the company thinks that its stock is undervalued. We recommend buying Marriott International to benefit from the return that the company wants to give to its shareholders through dividends and share repurchases.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Retail Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.