* All data are as of the close of Friday, November 28, 2014. Emphasis is on company fundamentals and financial data rather than commentary.
The Lodging industry is getting ready for the annual snow-bird migration period, when northern residents fly south for a little warmth and fun in the sun.
Yet investors in the Lodging space are quite aware of how volatile hotel stocks can be, given their extremely discretionary nature. When times get tough, vacation budgets are among the first expenses to be slashed, while when times improve, those long missed getaways become one of the first indulgences consumers treat themselves to.
Such volatility in the Lodging industry can be clearly noted in the graphs below. During the market downturn from mid 2007 until market bottom in March of 2009, where the broader market S&P 500 index [black] fell 56% and the Consumer Discretionary Select Sector SPDR ETF (NYSE: XLY) [blue] fell 60%, two of the nation's three largest Lodging companies - Marriott International, Inc. (NASDAQ: MAR) [purple] and Starwood Hotels & Resorts Worldwide Inc. (NYSE: HOT) [orange] - fell some 73% and 87%, respectively.
Yet during the economic recovery since early 2009, the hotels have been packed as though they were everyone's second home.
Where the broader market S&P has gained some 205% and the XLY has gained 345% since then, Marriott has surged 535%, while Starwood has soared 700%. Meanwhile, the largest U.S. company in the space - Hilton Worldwide Holdings Inc. (NYSE: HLT) - has been trading publicly since only December of 2013, but has likewise gained a posh 25% for its 11-month run.
On an annualized basis, where the S&P has averaged 36.18% and the XLY has averaged 60.88%, Hilton has averaged 27.27%, Marriott has averaged 94.41%, while Starwood has reached for the stars with a moon-shot of 123.53% per year!
Looking forward, the Lodging industry as a whole looks set to blow away the broader market's average earnings growth, as tabled below where green indicates outperformance and yellow denotes underperformance. This year's winter vacation season may be one of the best in years given the extra money consumers have been saving from their gasoline and home heating expenses.
Over the immediate two quarters, the industry is expected to grow its earnings at 9.54 to 25.35 times the market's growth rate, before settling in for a more sustainable but still robust 2.45 times in 2015, and 2.10 times beyond.
Zooming-in a little closer, however, the three largest U.S. Lodging companies are expected to put in a split performance pretty much in line with their size, with the larger caps gaining the advantage as tabled below, where Hilton is seen growing the most, while Starwood grows the least.
Even so, all three companies are expected to outgrow the broader market at some 1.20 to 2.00 times its growth rate.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, Marriott posted the greatest revenue and earnings growth year-over-year, while Starwood reported shrinkage.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, Marriott operated with the widest profit and operating margins, while Hilton contended with the narrowest.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, Marriott's management team delivered the greatest returns on assets, while Hilton's team delivered the lowest.
Since Marriott's return on equity is not available, the metric will not factor in the comparison.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, Starwood provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while Hilton's DEPS over current stock price is lowest.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, Starwood's stock is the cheapest relative to forward earnings and priciest relative to 5-year PEG, while Hilton reciprocates with overvalue relative to earnings and undervalue relative to PEG.
Since Marriott's price to company book value is not available, the metric will not factor in the comparison.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, Marriott offers the highest percentages of earnings over current stock price for the next quarter, while Starwood offers it in all remaining time periods. At the low end of the scale, Hilton offers the lowest percentages in all time periods.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, Marriott offers the greatest growth in the next quarter, while Hilton offers it in all remaining time periods. At the slow end of the spectrum, Starwood offers the slowest growth in all time periods.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe Marriott's stock offers the least upside potential and greatest downside risk, while Hilton's offers the greatest upside and Starwood's offers the least downside.
It must be noted, however, that Starwood's stock is already trading at its low target. While this may mean an increased potential for a sharp move upward, it may warrant a reassessment of future expectations.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, Hilton is best recommended with 3 strong buys and 14 buys representing a combined 80.96% of its 21 analysts, followed by Starwood with 6 strong buy and 14 buy recommendations representing 74.07% of its 27 analysts, and lastly by Marriott with 6 strong buy and 7 buy ratings representing 48.15% of its 27 analysts.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below, you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… a twin bed suite for both Marriott and Starwood, each netting a score of +2, followed by Hilton with a net score of -3. To break the tie, I would normally give the contest to the company with the most first place finishes. But since both companies have scored precisely the same finishes, it really comes down to just a coin toss. Perhaps we'll just have to give it to the one that places the sweetest candy on our pillow.
Where the Lodging industry is expected to outperform the S&P broader market astronomically this and the next quarters, and significantly in 2015 and beyond, the nation's three largest companies in the space are expected to split perform pretty much in line with their market caps, with the larger Hilton growing its earnings the most and outperforming the broader market the most, while the smallest Starwood grows its earnings the least and underperforms the broader market longer term. Though all three are expected to outperform the broader market in 2015.
Yet after taking all company fundamentals into account, Marriott and Starwood are seen as the most accommodative to investment portfolios - comfortably winning the Lodging industry competition.