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A Boring, $3 Billion Hotel Infrastructure Play

Murky growth prospects cloud this cash-flow generator's future


Hotel stocks are good places to be right now.

The industry is doing very well thanks to a recovery in business and leisure travel, which has created a shortage of supply and a modest increase in demand. And on top of the sector recovery, almost all hotel stocks pay dividends.

The only thing that could possibly be better is some kind of infrastructure play. And, as it happens, I managed to find one.

Micros Systems (NASDAQ:MCRS) has exactly the kind of description I both love and hate. I love Micros Systems because it’s boring. Boring companies tend to be overlooked and undervalued until the market notices the strong cash flow and sends the stock on a tear.

But I hate MCRS because it’s boring … because that usually means you and I don’t inherently know what it does, making homework all the more intensive.

Micros Systems offers enterprise information solutions for hotels. So when you check in or out or make a reservation or anything involving a computer, the company handles it. Micros also handles some hardware, as well as software solutions for all the things that go on in the back office you don’t want to know about.

Of course, a company with these kinds of offerings also has to provide installation, training, maintenance, configuration — all high-margin services that you and I are happy to pay other people to do.

Micros reported way back in March, but the numbers are very compelling. Revenue was up 13.3% — although that includes an acquisition, which when pulled out, results in a 4% revenue decline. Service revenues were up 20.5%, which is good because that’s high-margin work. Hardware revenues increases 2.3% but software was down 2%. Earnings grew to 55 cents per share from 53 cents.

The company is on solid financial footing, with cash at $670 million and no long-term debt, giving MCRS $8 in cash per share. This is not a capex-intensive business, so investors who like free cash flow will love the trailing 12-month FCF of $167 million. Macros also is buying back shares; however, insider ownership is tiny, which doesn’t thrill me.

However, things start to get murky when we look at growth.

FY13 earnings per share are expected to increase 7% — and because that’s EPS, that’s including share repurchases. FY14 looks to improve just 6%. Yet the 14 analysts who cover the stock peg long-term growth at 18%, so I guess they think 2015 is somehow going to be gigantic for the company.

What I see is a company with a solid foothold in its market, with no debt, that is generating lots of cash. On that basis, I love businesses like this. However, the growth picture just isn’t clear. On 2014 earnings of $2.52 per share, the stock is trading at a 17x multiple.

I’m not super confident in that 18% growth rate, and considering Micros’ relatively niche market, it’s difficult to adjust accordingly. For that reason, I’m going to stay away for the time being … at least until I get better clarity.

I think you’re better off sticking with hotel plays right now. I would recommend choosing from among Hyatt (NYSE:H), Marriott (NYSE:MAR), Starwood Intercontinental (NYSE:HOT), Pebblebrook Hotel Trust (NYSE:PEB), FelCor Lodging Trust (NYSE:FCH) and Host Hotels and Resorts (NYSE:HST).

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at and follow his tweets @ichabodscranium.

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