Starwood Beats on Top Line - Analyst Blog

Starwood Hotels & Resorts Worldwide Inc. (HOT) reported its fourth-quarter adjusted earnings from continuing operations of 52 cents, ahead of the Zacks Consensus Estimate of 39 cents and the year-earlier quarter's earnings of 51 cents. The earnings outpaced the guidance range of 36 cents to 38 cents.

On a GAAP basis, including an after-tax benefit of $107 million primarily related to the settlement with the IRS, Starwood recorded earnings of $1.08 compared with the loss of $1.03 in the year-ago quarter.

The quarter's better-than-expected earnings were aided by an increase in demand for hotels. Revenues jumped 7.5% year over year to $1,340 million in the quarter, with revenue per available room witnessing a considerable growth in the quarter. The quarter revenue also outperformed the Zacks Consensus Estimate of $1,338 million.

The company's full-year adjusted earnings per share were $1.25 versus $1.02 in full fiscal 2009. Revenues were $5,071.0 million in full fiscal 2010, representing a year-over-year growth of 8.0%.

Inside the Headline Numbers

The company continued to experience occupancy gains on the back of a recovering economy and surging demand for leisure. Average daily room rate also posted impressive results. Management fees increased 23.1% to $128 million and franchise fees jumped 20.0% to $42 million.

System-wide RevPAR for same-store hotels increased 10.0% (10.3% in constant dollars) year over year all around the globe. System-wide RevPAR for same-store hotels in North America rose 10.2% (9.7% in constant dollars). RevPAR in Asia-Pacific and Latin America registered strong growth and shot up 20.3% (15.1% in constant dollars) and 17.2% (same in constant dollars), respectively.

Worldwide RevPAR for Starwood branded same-store owned hotels spiked 10.1% (10.9% in constant dollars) from the prior-year period. RevPAR for Starwood branded same-store owned hotels in North America climbed 9.1% (8.1% in constant dollars). Internationally, Starwood branded same-store owned hotel RevPAR increased 11.6% (15.0% in constant dollars).

Total vacation ownership revenues were flat year over year at $135 million. However, there was a 1.2% drop in originated contract sales of vacation ownership intervals due to lower average price.

The increase in RevPAR along with cost control resulted in improved margins. Worldwide same-store company-operated gross operating profit margin was up about 100 basis points (bps), driven by a 20-bp improvement in International and a 200-bp rise in the North American division.

Update on Hotel Rooms

During the quarter, Starwood signed 37 hotel management and franchise contracts with approximately 8,000 rooms, of which 29 are new builds and eight are conversions from other brands. The company also opened 23 additional hotels in the fourth quarter of 2010.

Financials

At the end of 2010, Starwood had cash and cash equivalents of $797.0 million (excluding $44 million of restricted cash) while its net debt was $2,060.0 million.

Outlook

Starwood expects its first quarter 2011 earnings to be within 22 cents to 26 cents, with a RevPAR increasing at 8% to 10% in constant dollars. Adjusted EBITDA is expected to range from $195 to $205 million. The Zacks Consensus Estimate for the quarter is 24 cents.

For full-year 2011, the company expects earnings to remain in the range of $1.55 to $1.65 per share with an increase in RevPAR between 7% and 9% in constant dollars. Adjusted EBITDA is expected to range from $975 to $1.0 billion. The Zacks Consensus Estimate for 2011 is $1.57.

Our Take

We believe Starwood Hotels is poised to benefit from the reviving economy. Starwood is aggressively expanding its footprint in the Asia-Pacific region particularly China and India, where demand is high and the pace of economic recovery is fast.  In the developed market, company should benefit from limited supply. Pricing power is also returning to the hotel owners.

Additionally, Starwood's strong pipeline, fee-based business model and a less capital-intensive timeshare business are expected to augur well for its business.

On the flip side, a high unemployment rate and heavy public/private debt burden in the developed market will likely limit new demand growth in an industry marked with high supply growth. We also expect estimates to move up in the coming days, based on better-than-expected results and improvement in economy.

One of Starwood Hotels' primary competitors, Marriott International Inc. (MAR) will report its fourth quarter earnings on February 14, 2011.

 
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