Starwood Hotels and Resorts Worldwide Inc. (HOT) has in a few short years emerged as the premier owner and operator of high caliber, best-in-class hotel properties in the world.
The company as of year-end 2008 employed 145,000 people and owned and operated 940 properties in 97 countries.
The hospitality industry has been especially hard hit by the global recession. The industry in general is experiencing a significant decline in Revenue Per Available Rooms (REVPAR), the standard measure of performance in the hospitality business, ranging from 12% to 18%.
REVPAR at Starwood dropped 13% in 2008, contributing to a loss of $0.25 for the fourth quarter. The company has not formally issued guidance for the current year, but is anticipating a further decline of 13% to 15% for 2009 and is reducing staff and capital expenditures in response.
Operating income is expected to decline by $50 million.
Even with the reduction in capital expenditures, Starwood anticipates the opening of 50 properties in Europe, Africa and the Middle East (EAME) this year. The hotel chain remains committed to its goal of a 40% increase in rooms over the next 5 years.
Most of the increase will be in Starwood’s luxury brands, including St. Regis, W, Westin, Le Meridien, Sheraton and Sheraton Four points.
HOT has had a precipitous decline in price during the last 6 months, reaching its 52 week low at $8.99 in early March of 2009. The stock continues to trade at a depressed level, currently priced at $11.50. In spite of the pricing strain the company is experiencing, Robert W. Baird just recently upgraded the company rating to “Outperform”.
The company balance sheet is marginal at best, with long term debt of $3.5 billion and equity of $1.62 billion. Current liabilities exceed current assets by 25%. While these ratios are of some concern, the availability of $1.75 billion under the current revolver provides some cushion. While the price of Starwood stock has recently hovered near the 52 week low, company bonds have moved to levels reflecting junk status.
Though still retaining investment grade status, the bonds are yielding returns indicating investor concerns about the industry.
Starwood bonds due in 2013 carrying a coupon rate of 6.25% are trading at 73.25 resulting in a yield to maturity of 15.6 %. Bonds due in 2018 with a coupon of 6.75 % are yielding 14.04%.
Even with some weakness in the Starwood balance sheet, the company retains sufficient liquidity to make interest payments when due and to meet principal maturity requirements.As the world economy improves and leisure and business travel increase, Starwood bonds will increase in value and deliver solid returns for the investor.
This article was written by Jamie Dlugosch, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.
