At first glance, Marriott’s (NYSE:MAR) second-quarter results looked good. Earnings grew 13% from a year ago, and revenue rose 7.3%. Yet the shares of Marriott plunged nearly 7% to $34.70 in Thursday’s trading.
The problem? The company’s forecast was a bit weak.
But could this be an overreaction? Is the price fall an opportunity to pick up shares of Marriott on the cheap?
Let’s take a look at the pros and cons:
Pros
Diverse platform. Marriott operates 3,545 lodging properties across the world. But the company also has corporate housing properties and time-shares (however, this business is expected to be spun off). There are even services for condo associations.
Of course, Marriott also has a variety of hotel brand, including Renaissance Hotels, Courtyard by Marriott, Marriott Executive Apartments, SpringHill Suites and The Ritz-Carlton.
In fact, the brands are seeing lots of strength in global markets. In its quarterly report, Marriott said international revenue per available room, a common hotel-stock metric, increased by 12%. As should be no surprise, the company is investing aggressively in countries like China, India and Brazil.
Business model. To save on capital expenditures, Marriott generally looks to not own its properties. Instead, the company has services contracts with the landlords. As a result, Marriott has lower capital costs and can focus on expansion. Moreover, the management contracts usually have minimum fee levels, which can be extremely important during recessions.
Marriott Rewards program. This is one of the best in the lodging industry and has been a great way to create repeat business. And as the program collects more data, there are opportunities to launch new offers – which should help improve revenue.
Cons
Economy. Marriott’s business is highly cyclical. This was definitely apparent during the recession of 2008-2009.
Unfortunately, as seen with the latest data on unemployment, the U.S. economy continues to be sluggish. At the same time, there are problems continue in Europe.
Contracts. While Marriott’s services model has been a success, there are still risks. After all, if the economy continues to have problems, then property owners may push for lower fees or other favorable contract terms.
Competition. It is fierce. Besides the major chains – like
Starwood Hotels (Nasdaq:HOT), Hyatt Hotels (NYSE:H) and Hilton –there are also many local providers. Because of this, pricing can easily come under pressure.
There are also some interesting Internet providers, like HomeAway (Nasdaq:AWAY) and Airbnb, which are allowing people to lease out their homes as vacation properties.
Verdict
After a tough couple years, things are looking brighter for Marriott. More importantly, the company has some key advantages: strong brands, a
capital-light business model and growth opportunities in foreign markets.
What’s more, the hotel industry won’t see much expansion in capacity over the near term. Pricing should remain robust.
Thus, even though there may be some noise in the quarterly numbers, Marriot still has some strong fundamentals. The stock’s pros outweigh the cons.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
