Marriott After Earnings: More Room for Growth

Source: Marriott International.

Marriott International (NASDAQ: MAR  ) reported better-than-expected earnings for the first quarter of 2014 on Tuesday. Competitors such as Hilton Worldwide (NYSE: HLT  ) and Starwood Hotels (NYSE: HOT  ) are confirming that industry dynamics remain favorable for the sector, and Marriott has accelerated its expansionary plans to capitalize on opportunities lately. This hotel looks well positioned for continued growth.

Solid performance
Total revenues increased by 4.8% to $3.3 billion during the first quarter of 2014. This was primarily driven by healthy growth in revenue per available room, or RevPAR, during the quarter. RevPAR is an important metric used to measure demand in the hotel industry, and it's calculated by multiplying the average daily room rate by the occupancy rate during a particular period.

On a constant dollar basis, worldwide RevPAR increased by 6.2% versus the same quarter in 2013. In North America, a big market for Marriott, comparable systemwide RevPAR rose 6.3% during the period.

Adjusted for cost reimbursements, operating margin grew to 41% versus 38% in the same quarter in the prior year. Earnings per share jumped by a remarkable 33% year over year to $0.57, comfortably above Wall Street estimates of $0.51 for the quarter.

Marriott expects constant currency RevPAR during 2014 to increase between 4.5% and 6.5%, both in North America and on a global scale. Earnings per share are expected to be in the range of $2.39 to $2.53 during the year, representing a big increase of 20% to 27% versus 2013.

Favorable industry dynamics and a growing development pipeline bode well for Marriott when it comes to growth prospects in the medium term. The company has significantly accelerated its expansionary plans lately, and it now has over 200,000 rooms in its development pipeline, a 35% increase from a year ago.

While North America is likely to remain a major market for Marriott in the medium term, the company is mostly focusing on global markets when it comes to new projects.

Source: Marriott International.

Industry tailwinds
Lodging is a cyclical and competitive industry with high fixed costs. Differentiation is difficult to achieve, and hotels tend to compete aggressively on prices. For this reason, profitability depends to a good degree on the demand-versus-supply equation for the industry as a whole.

Fortunately for investors, big competitors such as Hilton Worldwide and Starwood Hotels are corroborating a solid environment for operators in the lodging business over the medium term.

Hilton Worldwide is scheduled to report financials for the first quarter of 2014 on May 9, but numbers for the fourth quarter of 2013 are providing a bullish outlook for the industry.

Hilton reported an increase of 13% in total revenues for the last quarter of 2013 to $2.6 billion versus $2.3 billion in the same period of the prior year. Systemwide RevPAR increased by 4.7% during the quarter, and adjusted earnings per share jumped by 10% versus the fourth quarter in 2012.

Management has optimistic expectations when it comes to performance during the first quarter and full year in 2014. Hilton expects RevPAR to increase by between 4.5% and 6.5% on a comparable and currency neutral basis, both during the quarter and the whole year. This is in line with guidance provided by Marriott for the current year.

Starwood Hotels recently announced numbers for the first quarter of 2014: Worldwide systemwide RevPAR for same-store hotels increased 5% in U.S. dollars and 6.3% in constant currency during the quarter. In North America, Starwood Hotels reported a 6.4% increase in RevPar for same-store hotels, which is translated into an even stronger increase of 7.1% when measured in constant currency.

Frits D. van Paasschen, CEO of Starwood Hotels, provided a positive assessment of the supply and demand equation in the North America hotel industry during the earnings press conference:

Across North America, occupancies once again were pushed to record highs. At this point, you'd expect late-cycle market dynamics in North America with RevPAR growth predominantly coming through higher rates, which is generally what we're seeing. Yet despite this, we're still several years away from seeing any real increase in supply in most markets. 

Foolish takeaway
Marriott International delivered solid performance for the first quarter of 2014, with both demand and profitability showing considerable increases during the period. The company is accelerating its growth plans lately, and competitors Hilton Worldwide and Starwood Hotels confirm that industry conditions remain favorable for expansion. Investors are welcome to stay at Marriott for further growth in the years ahead.

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Andrés Cardenal

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored. Follow me on Twitter for more investment ideas:

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