Starwood Goes on an Expansion Spree

| About: Marriott International, (MAR)

Starwood Hotels & Resorts Worldwide Inc. (HOT) is on an expansion spree. Last week, the company opened its 1000th hotel, the Sheraton Qiandao Lake Resort, located on the shores of China's Qiandao Lake. The lake is also known as the Lake of Thousand Islands.

Starwood is planning to open around 300 hotels in the next three to four years, most of them outside the U.S. The demand for hotels in the international market is greater than in the U.S., and the pace of recovery is particularly fast in the Asia-Pacific region.

Starwood is poised to benefit from this increase in demand for hotels outside the U.S. The company expects to open 80–100 hotels in 2010, approximately 70% of which will be outside the U.S.; the majority in the Asia-Pacific region.

Starwood plans to double the number of properties in China to 100 by 2012. The company is scheduled to open more than 20 hotels this year in the country. The company is also eyeing the Indian market. Currently, there are 26 hotels in its Indian operations, which it intends to increase by 60% by the end of 2012.

We have recently upgraded our recommendation on Starwood to Outperform. Starwood reported a fourth-quarter loss of $186 million or $1.03 per share from continuing operations. However, excluding special items, the company earned $95 million or 51 cents per share in the reported quarter. Adjusted earnings were well ahead of the Zacks Consensus Estimate of 22 cents per share, primarily driven by better-than-expected revenue.

Revenue fell 1.2% from the prior-year period to $1.28 billion. Though the company continued to experience a decrease in revenue per available room (RevPAR), the rate of deterioration has moderated. In fact, in recent months, the industry is showing signs of a RevPAR improvement, especially in the overseas markets.

Going forward, the company's strong pipeline, significant international exposure, solid balance sheet, shift to a fee-based business model and a less capital-intensive timeshare business bode well. However, overall pricing still remains weak, which in turn will pressure margin improvement in the near term.

Shares of Starwood increased 41 cents or 0.86% to $48.02 during Monday's regular session on the New York Stock Exchange.

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Tagged: , Lodging
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