Starwood Stays Neutral - Analyst Blog

We maintain our Neutral recommendation on Starwood Hotels & Resorts Worldwide Inc. (HOT).

We remain optimistic on the stock on some near-term revenue drivers like revenue per available room (RevPAR) growth, increase in occupancy rate, improving leisure industry outlook and continued growth in emerging markets. Starwood's third quarter 2010 operating earnings comfortably surpassed the Zacks Consensus Estimate on better-than-expected demand for hotels.

The company is geared to leverage from the recovery in hotel fundamentals. It has over half of its hotel properties outside the U.S., an international exposure that not many of its peers can boast. Additionally, over 80% of the company's 85,000 room pipeline will be built in international markets.

It currently generates around 62% of EBITDA from international markets and is targeting 80% in the medium term. New builds in emerging markets like China, India and Latin America where the pace of economic recovery is faster, should encourage the company's overall growth.

We also remain optimistic on Starwood's transition to more of a fee-based business model, which appears lucrative as the owner and developing partners provide the capital and the company earns a fee by managing/franchising the hotel.

Presently, Starwood generates 57% of overall EBITDA from fees. A higher concentration of fees will guard Starwood against earnings volatility and provide a more stable growth profile. 

Starwood's three-year scenario is expected to generate excess cash flow of $1.7 billion to $2.2 billion through 2013 and a net room growth of 3–5%, excluding proceeds from additional hotel sales over that timeframe. Starwood also intends to de-leverage its balance sheet to a targeted level of 3.0 times (gross debt/EBITDA) from the current 4.4 times.

However, in developed markets, unemployment remains extremely high and the pressure of public and private debt is mounting, leading to erosion in margin. With a slow booking pace and sluggish RevPAR improvement until economic recovery gains momentum, we do not see any significant top-line improvement in the near future.

As far as expansion in emerging markets is concerned, Starwood faces stiff competition from several other hotel brands such as Marriott and Wyndham. Both Starwood and Marriot derive their second largest revenue chunk from China. Additionally, owing to considerable exposure to foreign countries, Starwood remains prone to negative fluctuations in foreign exchange.

We also believe all the above-mentioned positive attributes are already reflected in the current valuation leaving little room for  any upside. Starwood currently retains a Zacks #3 Rank (short-term Hold rating). One of Starwood's close competitors Marriott International Inc. (MAR">MAR) also retains a Zacks #3 Rank.

 
STARWOOD HOTELS (HOT): Free Stock Analysis Report
 
MARRIOTT INTL-A (MAR): Free Stock Analysis Report
 
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