Most hotel chains, to some degree, rely on business travel, but few more so than Starwood Hotels (NYSE: HOT). The operator of upscale brands such as Sheraton, Westin, Four Points, and St. Regis depends on that segment for nearly 85% of its revenues. It comes as little surprise, then, that with corporate travel on the upswing, Starwood would report a continuation of the second quarter's show of strength.
Those numbers pale in comparison, though, to the banner third-quarter results that were posted yesterday. Net income more than doubled to $107 million, from $48 million the year before, on revenues that climbed 18% to $1.34 billion. Backing out one-time items, earnings from continuing operations jumped by two-thirds to $0.40, beating estimates by 3 cents.
Echoing comments made this month by rival Marriott (NYSE: MAR), Starwood reported a rise in both occupancy levels and pricing power. Average daily rates at owned hotels worldwide jumped 8%, which when combined with a 2.8% improvement in occupancy (to 71.5%) produced a RevPAR (revenues per available room) gain of 12.3%. North American RevPAR improved 12.1%, alongside gains in Europe, Latin America, and Asia/Pacific of 11.5%, 16.8%, and 15.2%, respectively. There was strength across all brands, with Sheraton leading the way at 16.1%.
Like Hilton (NYSE: HLT) and Marriott, Starwood has sold many noncore properties in an effort to reduce volatility in the cyclical industry. Instead, the company is generating an increasing percentage of its business from recurring base management, incentive, and franchise fees. The company owns or leases about 180 properties but manages twice that number for third parties and receives franchise income from 300 more. For the quarter, management and franchise fee income increased 54% to $105 million.
Starwood's timeshare business has been another key source of income and now represents about 13% of revenues. Vacation ownership sales jumped 36% to $175 million, driven by sales of units in Florida, Colorado, Hawaii, and other destinations. Not only did the number of contracts signed grow by 21%, but the average price per unit also climbed by 7.9% to about $20,000.
With a stiff tailwind from robust business travel, Starwood is predicting smooth sailing going forward. Management lifted full-year earnings guidance to $1.48 (well above Street expectations) and from there forecasted a 23% increase in 2005 earnings to $1.82. At 32 times this year's projected earnings, Starwood is not exactly a value play, but the growth rates, expanding margins, and improving balance sheet look attractive.
Considering Starwood has achieved eight consecutive quarters of systemwide domestic market-share gains, and is poised to add another 38,000 rooms now in development (including the Aladdin in Las Vegas), it might well be worth the price.
How are Starwood's competitors faring? Find out by reading:
Fool contributor Nathan Slaughter owns none of the companies mentioned.
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