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We recommend buying Marriott International (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.

Valuation (Undervalued)

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 (WYN) and Intercontinental Hotels (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:

Valuation Multiples

Market
Cap

Enterprise
Value

P/2013
EPS

P/2012
EPS

EV/2013
Revenue

EV/2012
Revenue

MAR

12.55bn

15.00bn

19.3x

23.0x

1.2x

1.3x

WYN

7.57bn

11.41bn

14.8x

16.8x

2.4x

2.5x

IHG

7.63bn

8.17bn

17.4x

19.6x

4.2x

4.4x

Growth

Revenue
Growth

EPS
Growth

FY13

FY12

FY11

FY10

FY13

FY12

MAR

9%

-6%

5%

7%

19%

27%

WYN

5%

6%

10%

3%

14%

27%

IHG

5%

5%

9%

6%

13%

6%

Profitability

Gross
Margin

EBIT
Margin

FY11

FY10

FY09

FY11

FY10

FY09

MAR

13.0%

12.6%

11.3%

4.3%

5.9%

-1.4%

WYN

52.4%

51.3%

51.4%

18.0%

18.6%

15.8%

IHG

56.4%

53.7%

44.1%

34.8%

26.8%

-0.7%

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).

Current Quarter
Estimates

Revenue

EPS

Average

2.65bn

0.40

Low

2.46bn

0.37

High

2.74bn

0.42

Year Ago

2.87bn

0.29

% Growth

-7.7%

37.9%

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.

2Q'12

1Q'12

4Q'11

3Q'11

% Surprise

0%

3%

-13%

7%

EPS Estimate

0.42

0.29

0.47

0.27

EPS Actual

0.42

0.30

0.41

0.29

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).

FY13

FY12

4Q'12

3Q'12

Current

2.01

1.69

0.57

0.40

7 Days Ago

2.01

1.69

0.57

0.40

30 Days Ago

2.01

1.69

0.57

0.40

60 Days Ago

2.01

1.69

0.57

0.40

90 Days Ago

2.02

1.65

0.56

0.37

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.

Moving Averages

· 20-Day Moving Average: Sell

· 50-Day Moving Average: Buy

· 100-Day Moving Average: Buy

MACD Oscillator

· 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.

Source: Buy Marriott Ahead Of Q3 Earnings