On Wednesday, Marriott International Inc (NYSE:MAR) beat earnings estimates. However, the Bethesda, Maryland-based hotel chain sold off as EBITDA guidance fell short.
As Marriott solidifies its place as the world’s largest hotel group, investors might wonder if this selloff creates a buying opportunity in MAR stock. Although Marriott remains the largest and arguably the most profitable hotel chain, the stock price looks to have moved ahead of fundamentals at these levels.
MAR Stock Beat Estimates But Reported Lower Guidance
For 4Q 2017, the hotel chain reported $1.12 earnings per share (EPS). This beat estimates by 12 cents per share. Earnings increased 32% from 4Q 2016 numbers. The company earned $5.88 billion in revenues for the quarter, $250 million higher than analysts predicted.
For the full year, MAR’s EPS came in at $4.36, 32% higher than last year. Revenues came in at $22.89 billion. This is up from $17.07 billion for 2016.
Nonetheless, EBITDA guidance came in lower than expected. The company expects EBITDA of $3.32-$3.42 billion, lower than the projected figure of $3.47 billion. As a result, the stock opened lower the next morning. Like many companies, earnings also took a hit from provisional charges related to the U.S. Tax Cuts and Jobs Act of 2017.
However, at 32% earnings growth, it goes without saying that MAR enjoyed a great year. Merging with Starwood Hotels last year greatly enhanced its competitive position. The merger helped the company add over 76,000 hotel rooms in 2017 alone.
The company has built itself by acquiring other hotel chains. Ownership of their brands has made Marriott the largest hotel group in the world. In addition to its flagship Marriott brand, its hotels operate under several other brands as well.
Sheraton, Renaissance, Ritz-Carlton and Westin are among the 30 brands the company currently owns. Today, it operates about 1.26 million hotel rooms across 6,500 different properties in 122 different countries. This is 500,000 more hotel rooms than its next largest competitor, InterContinental Hotels Group PLC (ADR) (NYSE:IHG).
MAR Stock Trades High But Remains the Best in Its Class
Trading as low as $56 per share two years ago, the stock has moved to about $140 per share range today. MAR stock has enjoyed a great decade as well as it’s up about 10-fold from its 2009 low below $13 per share.
With the 32% increase in EPS, prospective buyers will wonder whether an investment in Marriott stock will yield high profits. MAR stock trades at a price-to-earnings (PE) ratio of about 39. This ratio comes in slightly higher than the current 34 PE across the entire hotel industry.
The price-to-book value ratio of 11.75 greatly exceeds the 4.5 average in the industry. However, the 2.5 price-to-sales looks more attractive.
Despite the averages, valuations come in lower than other hotel chains such as Hyatt Hotels Corporation (NYSE:H) and Hilton Hotels Corporation (NYSE:HLT). Choice Hotels International (NYSE:CHH) and La Quinta Holdings Inc (NYSE:LQ) trade at lower multiples but do not enjoy growth rates as high as MAR stock.
Future predictions for growth forecast somewhat slower growth. Still, analysts expect growth over the next five years to average about 16.5% per year. That exceeds the growth rate expected from any of its major competitors.
Given the valuation metrics and the slowdown in earnings growth, paying 40 times earnings seems a little high. If I had to invest in the hotel industry, MAR stock remains the best of the lot.
With the acquisitions and growth, Marriott stock has produced high returns for its long-term investors over the last nine years. However, other industries offer lower valuation, higher dividends and more growth potential. At this stage, investors would better serve themselves by looking there.
Bottom Line on MAR Stock
MAR stock remains the best stock in a growing industry, but at these valuations, the stock looks expensive.
Without question, Marriott enjoyed a great 2017. The company’s profit growth and continued expansion have treated owners of MAR stock to impressive returns. Though growth will probably slow in future years, analysts expect growth to remain in the double digits. Still, at almost 40 times earnings, buyers should wait for a lower valuation before taking a position in this stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
