We recommend buying Marriott International (NASDAQ:MAR) ahead of its Q3 2012 earnings release on Wednesday, October 03, 2012, which we believe has a high probability of resulting in a positive earnings surprise that can lead to long-term stock outperformance and alpha generation. Our bullish call is based on a combined assessment of key variables across the areas of valuation, analyst estimate trends and technical strength, which we believe to be important predictive factors of earnings surprises and post-earnings stock price movements.
We believe Marriott International to be fairly valued on an absolute basis but undervalued on a relative basis. On an absolute basis, Marriott International's 2013 P/E based on consensus analyst estimates currently stands at 19.3x, which we believe to approximate fair value, given its projected 2013 EPS growth of 19%. On a relative basis when compared to its publicly traded comparables, Marriott International is valued at a slight premium to Wyndham Worldwide (NYSE:WYN) and Intercontinental Hotels (NYSE:IHG) on a 2013 P/E basis, partially as a result of its higher expected revenue and EPS growth in 2013. However, it's valued at a significant discount to Wyndham Worldwide and Intercontinental Hotels on a 2013 EV/Revenue basis, primarily as a result of its much lower gross and EBIT margins, which we believe are key potential sources of upside surprises that could drive significant long-term multiples expansion.
A summary comparables analysis is presented below to highlight key valuation multiples, growth, and profitability metrics between Marriott International and its comparables:
Source: Company filings, Yahoo Finance
Analyst Estimate Trends (Bullish)
Current Analyst Estimates
Revenue estimates for Marriott International's current quarter range from $2.46bn to $2.74bn, with an average estimate of $2.65bn (-7.7% from $2.87bn in 3Q'11), while EPS estimates range from $0.37 to $0.42, with an average estimate of $0.40 in EPS (+37.9% vs. $0.29 in 3Q'11).
EPS Surprise History (Neutral)
Marriott International has met or beaten EPS estimates in 3 of the past 4 quarters, although it did have a significant EPS miss of 6 cents in 4Q'11.
EPS Estimate Revisions (Bullish)
Recent analyst EPS estimate revisions have been bullish, with 3Q'12 EPS being revised up from $0.37 (90 days ago) to $0.40 (current), and full year 2012 EPS being revised up from $1.65 (90 days ago) to $1.69 (current).
7 Days Ago
30 Days Ago
60 Days Ago
90 Days Ago
Source: Yahoo Finance
Technical Strength (Bullish)
We believe Marriott International's underlying technical strength, as measured by its historical share price performance, to be bullish, with its intermediate and long-term moving averages under bullish signals and all MACD oscillators under bullish signals.
· 20-Day Moving Average: Sell
· 50-Day Moving Average: Buy
· 100-Day Moving Average: Buy
· 20-50 Day MACD Oscillator: Buy
· 20-100 Day MACD Oscillator: Buy
· 50-100 Day MACD Oscillator: Buy
Earnings Speculator is an investment advisory service designed to predict earnings surprises that often lead to long-term stock outperformance and alpha generation. However, given the highly uncertain nature of earnings results, we strongly recommend allocating no more than 2% of your portfolio to any one of our recommendations in order to sufficiently diversify your risk and be well positioned for long-term alpha generation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.