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 | Enterprise | P/2013 | P/2012 | EV/2013 | EV/2012 | |||
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 | EPS | ||||||
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 | EBIT | ||||||
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 | ||
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.
· 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.
