Throughout the last few years, the lodging industry has faced some uncertainties like recessions, lower spending and private home-sharing companies, which took a significant chunk of market share in the form of booked rooms per year.
Even still, Marriott International (MAR) has looked to industry consolidation through acquisitions and has boosted its brand awareness and customer retention through loyalty programs and nationwide marketing campaigns, which has allowed it to not only survive, but thrive.
The company operates a whopping 30 brands of hotel chains around the world and is a leading player in the lodging industry. The company operates these brands under 3 segments: Luxury, Premium and Select, alongside its condo and timeshare programs.
Hotel chains including JW Marriott, The Ritz-Carlton, W Hotels, The Luxury Collection, St. Regis, EDITION and Bulgari are operated under the company's luxury hotel segment. Hotel chains like Marriott, Sheraton, Westin, Renaissance, Le Meridien, Autograph Collection, Delta Hotels, Gaylord, Marriott Executive Apartments and Tribune Portfolio are operated under the company's premium hotel segment. Hotel chains like Courtyard, Residence Inn, Fairfield, Springhill Suites, Four Points and TownePlace Suites are operated under the company's select hotel segment.
Given industry-wide headwinds and competitive threats, Marriott merged with hotel giant Starwood to form its current self and completed the transaction in 2016. The company took on brands like Westin, Sheraton, W Hotels, St. Regis, The Luxury Collection, Four Points, Le Meridien, Aloft, ELEMENT and Tribune Portfolio. They expected $250 million in synergy savings from the transaction.
Marriott International owns around 1% of its hotels, has management agreement for 42% of properties, franchise agreements for 52% of properties and 2% are in the form of joint ventures around the world. The company manages and operates 2,020 properties for a total of 566,729 rooms around the world and manages some condominium complexes and associations around the US. The company's franchise agreements manage another 4,735 properties with a total of 729,413 rooms across the globe and its joint venture operations operate 151 properties with a total of 21,169 rooms.
The company has nearly full say in their managed properties and they hire workers and managers, renovate rooms and take care of the day to day operations and are reimbursed from the property owners on a basis of sales.
Marriott's franchise agreement has a similar oversight factor and generates revenues from an application fee set when the property is opened as well as 4% to 6% royalty fee from revenues generated by the business.
(Source: Company 10K)
The company operates one of the highest grossing loyalty programs in the lodging industry, with over 50% of total rooms booked coming from members. They've partnered with and American Express (AXP) and JPMorgan Chase (JPM) to launch a credit card that rewards points for hotels and airline miles on everyday purchases and has a high customer and business retention rate.
The company combined the loyalty programs from their Starwood merger to include the Starwood Preferred Guest in all of its hotel chains, which further drove customer retention rates from affiliated properties.
Competitive Headwinds Persist
Even as the company holds one of the largest hotel brand portfolios in the world, headwinds from competitors across the lodging markets persist. There are roughly 1,400 lodging operators in the US and 21 of those manage over 100 properties and include some mega-players like Hilton Worldwide (HLT) (HGV), Hyatt Hotels (H), Wyndham (WY) and InterContinental Hotels (IHG). Although the company currently holds around 15% of the US market share (based on number of rooms) and under 4% of the global market share, they remain pressured by the other major players as well as private ones, including AirBnB (AIRB) and HomeAway, which are home sharing platforms that have been gaining steam over the past few years.
The company remains slightly ahead of most of its competitors, however, due to brand recognition and their customer retention numbers. According to industry analysis, over 70% of rooms booked in the United States in 2018 were done with recognized public brands, of which Marriott holds a considerable market share in. This has allowed the company to generate a higher RevPAR (revenue per available room), which has then snowballed into better franchise terms and demand, boosting their domestic international presence.
(Source: Company 10K)
The company is well capitalized as it generates $1.52 billion in free cash flow annually (based off 2018 figures). The company reported net income of nearly $2 billion on sales of $5.21 billion for the year, figures which are expected to climb in 2019 and 2020.
The company's debt surged post their Starwood merger and they now hold over $8.5 billion in long term debt obligations and pay $340 million in annual interest expense. The company's maturities in 2019 and 2020 are well within the company's reach at $827 million and $900 million, respectively, but will likely need some restructuring in 2021 when $3.1 billion of debt matures.
As the company pays out well under 30% of its available income as dividends, something which I will touch upon in greater length later on, leaves the company well positioned to accumulate enough cash (beyond their current $315 million available) to stay ahead of maturities and reduce interest expense. The 2021 maturity, if paid in full, can save the company ~$100 million annually in interest expense, something that can help increase shareholder value or further international expansion.
Shareholder Value in need of a raise?
The company's shareholder value program in the form of dividend payouts have been rather unsteady in recent years as they've worked on increasing their market share via acquisitions and experienced some headwinds in 2012 and 2014. The company is set to pay out $560 million in dividends in 2019, just 26% of expected $2.095 billion in net income or slightly more as FCF %.
The company, as discussed later on, has the opportunity to continue and grow its sales and net income slightly ahead of population growth and economic stabilization as it continues to aim at capturing more market share, but it remains a slightly un-enticing story for investors who seek more out of the company's shareholder value program.
The company has, however, gone on a large share repurchasing spree since it first announced an increase in 2017. The company repurchased 21.5M shares of its common stock in 2018, or about 6% of its float, and they have 10.7M shares left to be purchased under their original authorization plan for a further option to reduce share count by 3.2%. In February of 2019, the board of directors approved another 25M shares to be repurchased, which will shrink shares outstanding by an additional 7.6% throughout the authorization period. Based on the average price of $130.00 per share of repurchasing throughout 2018, they are expected to spend over $4.6 billion on share repurchases throughout the time period allotted.
Even as the company has a massive buyback program in place, giving a potential return of over 10% to shareholder from todays share price, cash payments only total $560 million annually and can be increased to entice investors, as the company yields less than 1.4% at current prices.
Expectations and Valuation
The company expects EPS to rise 14.7% to $6.17 in 2019 as revenues rise 4.35% to $21.6 billion. In 2020, analysts expect a further rise of 14.9% in EPS to $7.09 and a 4.2% rise in revenues to $22.5 billion. The company's continued increase in RevPAR and market share along with its share repurchase program will be the primary drivers for their EPS growth outperforming their revenue growth throughout the mentioned time period.
A comparative analysis can be done to determine how the company should be valued for 2019.
|EPS Growth||REV Growth||P/E||P/S|
(Source: SeekingAlpha company earnings data)
As you can see, the company seems to be slightly undervalued both by a price to earnings multiple when compared to peers with the same or lower growth rate and also by sales multiples given similar growth rates by peers.
I believe, based off peer comparison, that the company's price to earnings multiple should be around 21x 2019 earnings given their higher RevPAR and cost control opportunities (mentioned in 10K and performed in the 2009 recession) presenting a fair value of $130.00 per share for 2019, higher by around 8.3% from its current price.
When looking at sales, the company's fair value multiple should lay around 2.1x given their peers performance and expectations. A 2.1x multiple on $21.6 billion in expected sales projects the company's fair value at $45.36 billion, higher by ~12% from the company's current market capitalization.
On average, I believe the company is undervalued by around 10% from its current price given EPS and revenue growth estimates in relation to peers and has an additional ~7% gain opportunity from their share repurchasing program, when we match similar volumes to buybacks performed in 2018.
All in all, I am quite bullish on the company's year ahead.
As the company is well positioned to capture the further stabilization of international markets and economies alongside modest population growth in key US markets (with a larger retiring population as a percentage of total population), they continue to lower dividend payout as they grow.
Given the S&P500's 1.94% yield, even as it has a major share repurchasing program in place set to increase value by about 7%, a raise in dividend might give investors more optimism about the company's financial performance, especially as the lodging markets continue to improve. The company's competitors, such as Wyndham and InterContinental, both yield around 2% and have similar growth expectations for 2019 and 2020 and would go a long way to be matched by Marriott from an investor standpoint.
Overall, however, the company's international expansion and solid financial position and cash generating abilities put them in a leading position within the industry with 15% of domestic market share and around 4% of the global one. The company is working on international and some domestic expansion and has a pipeline of 478,000 rooms (more than half outside the US) under contracts and expects to grow available rooms by 5.5% in 2019, which includes 1.25% of room exits throughout the year.
As they continue this growth internationally and improve conditions domestically, I believe the company's share price has room to appreciate between 15.3% and 19%, given EPS and revenue expectations alongside share repurchasing authorizations to present a fair value range of $138.00 per share to $142.80 per share.
I am bullish on Marriott International for 2019 and believe more value can be extracted from their cash flow generation in the form of a higher dividend payout, but time will tell.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MAR over 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.
Additional disclosure: Opinion, not investment advice.