fool.com: Marriott Corporation (Drip Port) May 3, 1999

<THE DRIP PORTFOLIO>
Marriott Corporation
Nice hotels, what about the Drip?

by George Runkle (TMFRunkle)

ATLANTA, GA (May 3, 1999) -- Last week in my Drip report I mentioned Marriott Corporation (NYSE: MAR). This company has a strong brand name and a reputation for quality. Its business includes hotels, senior communities, food distribution, and time share resorts. Marriott Corporation started back in Washington, D.C. as a family business when J.W. Marriott Sr. began selling food at his A&W Rootbeer stand. It has since become a world-wide company with brands such as Ritz Carlton, Ramada, Residence Inn, Courtyard Hotels, and Fairfield Inn. The company does offer a Dividend Reinvestment Plan; however, you have to purchase the first share yourself. First Chicago Trust Corporation administers it. For specific details, you may find them on First Chicago's website, www.fctc.com.

Let's get down to business and look at the company. I pulled this one up from Peter Lynch's advice to "buy what you know." Over my career I have had to travel quite a bit, and I've gotten to know motels. Some chains are notoriously bad and those are easily avoided. The other problem with many motel chains is there is no consistency in price and quality from location to location. Marriott does not fall into either category. It provides quality accommodations that are consistent from location to location. They also provide motels and hotels to fit most budgets. Corporate CEO's can stay at the luxurious Ritz-Carltons, while us working stiffs can be quite happy at the more budget friendly Fairfield Inns.

So, from all of this, is Marriott a good investment? The company's business profile looks quite good and in the past year the stock has appreciated 49.5%. The First Call consensus is for 18% earnings growth long term. This makes the stock look quite attractive. However, I'm not familiar with the Hotel/Motel business beyond staying in them. Is it an industry worth investing in? How does Marriott stack up with other criteria?

I decided to take out the new Gardner Brother book, Rule Breakers, Rule Makers (blatant promotion) and compare Marriott to Tom Gardner's Rule Maker criteria. How will it do? Tom has seven criteria; each can carry a score of 0 to 2. What do we get?

1. Mass Market, Repeated Purchase, Low Price Products: This is rather subjective, but I think Marriot does have this with its various levels of motel chains, and many of us repeatedly stay in motels. I give it a 1.

2. Gross Margin: This is calculated as (sales - cost of goods sold)/sales. In its financial statement, Marriot doesn't list "cost of goods sold," which makes sense. Hotels and motels don't really sell a physical object. I'll give them a 1.

3. Net Margin: (Operating Income/Sales) This is only 5%. That's not good, Tom wants at least 7%, so it gets a 0.

4. Sales Growth: From the 1998 annual report, Marriot has increased sales 10% over the year. That gets them a 2.

5. Cash to Debt Ratio: The company carries quite a bit of long-term debt. It's understandable, because hotels and motels are expensive and have to be financed somehow. Its ratio is 0.41, which gets it a 0.

6. Foolish Flow Ratio: This is (current assets - cash)/current liabilities. I calculated 0.66, which gives Marriot high marks. It gets a 2.

7. Your Familiarity and Interest: Not everybody travels like I do, but so what, I'm writing this. They get a 2, the highest mark.

In the end, Marriott scores an 8 out of a possible 14. Is that high enough? It scores 57%, which wouldn't have let most of us pass any courses we took in school. Tom Gardner wants a 12 out of 14 (aren't you glad you didn't study under him?). While I will continue to stay at Marriott motels, I don't foresee investing in the stock. The two items that really hurt this business is the high debt and the low margins. From what I've seen, there isn't much price competition in the higher-end hotels, but there is only so much business there. And the lower to mid-priced motels can only charge so much before people will stay somewhere else. Along with this, a considerable staff is required to run a motel, plus the utilities and maintenance have to be high. This obviously puts a squeeze on the margins. While it is certainly good to invest in what you know, not everything you know is worth investing in.

While we are on the subject of travel, I will be in Japan next week and the week after. Like I always do before I take a big trip, I'll be tying up some loose ends. There are a few items from my previous reports that need further attention, and next week I'll talk about them.

For more thoughts on investing in what you know, see the Fool's special report on the man who has made billions doing just that: Warren Buffett. The Fool's own TMFPuck is attending the annual meeting of Buffett's company, Berkshire Hathaway (NYSE: BRK.A), and reporting back to interested Fools everywhere. For a report from Omaha, Nebraska, land of Warren, click here.

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