Should I Buy Marriott? 3 Pros, 3 Cons

by Tom Taulli | July 12, 2012 11:44 am

Should I Buy Marriott? 3 Pros, 3 Cons

mar1 Should I Buy Marriott? 3 Pros, 3 Cons[1]Thursday has been a bad day for Marriott International (NYSE:MAR[2]).

The hotelier reported a decent second quarter on Wednesday, with earnings of $143 million (42 cents per share) matching analyst expectations and marking a 6% improvement from the year-ago period’s $135 million (37 cents).

However, Marriott did see revenues fall for the second straight quarter. And while guidance was good, the company’s warnings about weakness in Asian and Middle Eastern markets also spooked investors. As a result, MAR stock is off about 5% in midday trading.

Investors still have made out on Marriott, having wrung about 25% in returns out of MAR stock since Jan. 1. So should you buy Marriott stock in hopes that today’s action is just a dip, not a trend? To decide, here’s a look at the pros and cons:

Pros

Diverse Platform: Marriott has more than 3,500 hotel locations in over than 50 countries. Some of its brands include Renaissance Hotels, Courtyard by Marriott, Marriott Executive Apartments, SpringHill Suites and The Ritz-Carlton. The company also provides services for condominium associations. North America has been particularly healthy. According to the latest earnings report, Marriott has seen continued strong demand from corporate customers, such as in the technology and consulting industries. In fact, the company has been able to pass along price increases as well.

Business Model: Marriott is a capital-light company; it generally does not own its properties. Instead, it provides ongoing services contracts for landlords. Because of this, Marriott has been able to lower its risks and generate stronger margins.

Marriott Rewards Program: Marriott’s program is considered one of the best hotel rewards plans in the world, and it has been a key growth driver for the company. It has been a tremendous way to bolster repeat business, as it has helped Marriott better understand customer needs, and it has influenced programs across other hoteliers.

Cons

Economy: While the North American market seems to be intact, the company warned of problems in international markets, such as China and the Middle East. Especially worrisome is a pullback in higher-end spending, which has plagued numerous luxury names[3].

Valuation: Even after Thursday’s midday drop, Marriott’s valuation still is in the nosebleed seats at a hefty 63 times trailing earnings. Its forward P/E of 18 is more reasonable, but still not ideal. Its modest 1.4% dividend yield doesn’t make it much more appealing, either.

Competition: If you’ve ever seen a highway exit sign, you know the environment is intense. Marriott’s rivals include Starwood Hotels & Resorts (NYSE:HOT[4]), Hyatt Hotels (NYSE:H[5]), Hilton and Host Hotels & Resorts (NYSE:HST[6]). Marriott also faces some less traditional — but still disruptive — threats. For example, companies like Airbnb[7] are making it easier for people to rent out their own homes to travelers.

Verdict

After the recession of 2008-09, the hotel industry has seen little investment in new capacity, especially in North America. This has been a huge benefit for Marriott, and it also has helped that the company has a variety of strong brands and an asset-lite business model.

Still, the short term has plenty of risks, including the aforementioned threat of international slowdown, as well as the United States’ tepid recovery. Without improvement — and as less-expensive video technology is increasingly adapted — there likely will be even more reductions in corporate travel.

So in light of all this, should you buy Marriott stock? No — for now, the cons outweigh the pros.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to [8]IPO[9].  Follow him on Twitter at @ttaulli[10] or reach him via email[11]. As of this writing, he did not own a position in any of the aforementioned securities.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2011/06/mar1.jpg
  2. MAR: http://studio-5.financialcontent.com/investplace/quote?Symbol=MAR
  3. has plagued numerous luxury names: http://investorplace.com/2012/06/in-retail-stocks-the-high-ends-pain-is-the-low-ends-gain/
  4. HOT: http://studio-5.financialcontent.com/investplace/quote?Symbol=HOT
  5. H: http://studio-5.financialcontent.com/investplace/quote?Symbol=H
  6. HST: http://studio-5.financialcontent.com/investplace/quote?Symbol=HST
  7. Airbnb: http://investorplace.com/ipo-playbook/5-hot-ipo-possibilities-for-2012/
  8. How to Create the Next Facebook: Seeing Your Startup Through, from Idea to : http://goo.gl/RVJL9
  9. IPO: http://goo.gl/RVJL9
  10. @ttaulli: https://twitter.com/ttaulli
  11. email: mailto:tom@taulli.com

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