The pandemic has obviously had a major effect on our everyday lives. While its effect on people's health is the most important one, efforts to control the virus have curtailed business and personal travel, hurting the lodging industry.
Naturally, Marriott International's (MAR -0.87%) results were not spared. With the stock price down more than 30% this year, is this a buying opportunity?
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Still economically sensitive
Marriott has an "asset-lite" approach whereby it owns very few properties -- less than 1% of its 1.4 million rooms. The remaining 99% are either franchised, or Marriott manages the property.
When Marriott franchises a hotel, it receives fees based on the property's revenue. Under management agreements, it earns a base fee that is a percentage of revenue and an incentive fee that is a piece of the profit.
Certainly, since these are based on how well a property performs, these will fluctuate with the economic cycle. However, Marriott is not responsible for the hotel's operating expenses or capital improvements, which typically provides more financial flexibility.
Of course, these aren't normal times. Occupancy levels improved as time went on, from an abysmal 11% in mid-April, but it was still a low 34% at the start of August. The company is also working with hotel owners and franchisees, including deferring charges. While ensuring their survival benefits Marriott in the long run, it does mean less cash flow right now.
With many properties forced to close, Marriott's second-quarter revenue plummeted more than 70% versus a year ago to $1.5 million.
The company does have some geographic diversity, which should help as regions recover from the pandemic and economically at different rates. For instance, Marriott's Greater China area, the first place affected by COVID-19, started experiencing higher demand and all previously closed hotels have now been reopened. Still, the company is heavily reliant on North America, which was responsible for over 80% of last year's revenue.
A lot of uncertainty
Management has addressed its costs, including furloughing workers, reducing work weeks, looking for volunteers to leave, and layoffs. Clearly, the last step means it doesn't expect a quick rebound. As Leeny Oberg, Marriott's chief financial officer, stated on the second-quarter earnings call: "The extent of the decline in our business and our expectation that it will take time for demand to return fully require these measures."
The pandemic is still causing governments and companies to keep certain restrictions in place. Until there is an effective vaccine that receives various governmental approvals and there is widespread access and acceptance among the world population, hotel demand is likely to remain subdued.
If this was merely a cyclical downturn, the stock would present an opportunity for investors willing to wait out the storm. But, with so much uncertainty created by the pandemic and the effect on travel, along with potentially permanent changes to business trips as companies continue adapting technology, you should sit on the sidelines for now until the picture becomes clearer.
