For Marriott, It's Time To Party Like It's 1998; SunTrust Upgrades

• Marriott International Inc MAR shares are down 13 percent year-to-date, declining continuously after hitting $77 on July 29.
• SunTrust Robinson Humphrey’s Patrick Scholes upgraded the rating on the company from Neutral to Buy, while raising the price target to $92.
• Historical data shows that there may be upside to the company’s shares, Scholes said.

Analyst Patrick Scholes said that although the overall lodging sector is unlikely to outperform, Marriot “stands out as an outperformer amongst the hotel owners (REITS) and managers/franchisors (C-Corps) at this point of the cycle.” This has historical evidence.

Despite the low-to-mid-single digit RevPAR environment, Marriott could generate robust earnings growth.

Scholes explained, “Low to mid-single digit RevPAR growth over the next 18 months plus an accelerating supply pipeline in which Marriott is taking far more than their fair share combined with high-levels of share repurchases and low levels of CAPEX equate to continued mid-teens (at least) EPS growth through 2017.”

Industry-wide new room supply in the US could grow about 1.5-2 percent each year between 2015 and 2017, with 2-3 percent growth in US real GDP. Marriott’s new openings stand at about 7 percent growth per annum.

Marriott’s unit growth was 9 percent in 1998, versus US industry supply at 4 percent, with 4-5 percent real GDP growth. This also represents “a spread of 500 bps. between what MAR was doing and the industry was growing,” Scholes mentioned.

In the report SunTrust noted, “We see MAR benefiting the most of any lodging company from new supply given their over-indexed share of new rooms and from having very minimal owned hotel exposure. For MAR as a rule of thumb, a change of 1% for rooms is worth about $20M, or approx. $0.05/share.”

Scholes said that Marriott is “far less” in need of capex than its peers and could, therefore, repurchase shares worth about $1.0-$1.2B in each of 2016 and 2017.

“History has shown us that in the later stages of the cycle, a stock like MAR can still work. We see this cycle very similar to that of the 1992-2001 cycle,” Scholes added.