Marriott International (NASDAQ:MAR) has been hit hard by the effects of COVID-19, which has impacted worldwide business and personal travel. In this unique environment, occupancy at its properties plummeted to 11% in April, and it was still only at 34% at the start of August.
With the stock down by nearly 40% year to date, it is tempting to purchase shares. However, it is important to look beyond the big price drop to determine whether this is a value stock or a value trap.
Let's examine Marriott closer to answer that question.
Property performance counts
Marriott's approach is to own very few of its properties. Owning less than 1% of its 1.4 million rooms means more than 99% are under franchise or management agreements.
Under these arrangements, Marriott does not pay for the hotel's operating expenses or capital improvements. Rather, it collects a percentage of the property's revenue. With management agreements, it also has the potential to earn incentive fees, which is a portion of the profit.
However, that means Marriott still relies on its properties generating revenue, and it is not immune to the effects of COVID-19 on the travel and lodging industry. Naturally, its second-quarter revenue was hurt, falling by 72% versus a year ago, from $5.3 billion to $1.5 billion. The company posted a $109 million adjusted operating loss compared to last year's $786 million in adjusted operating income.
While this wasn't a good quarter, the key question is how quickly results will rebound.
Obviously, the pandemic means this is not your typical recession. Management has taken steps to address the situation, including implementing layoffs, indicating it expects business to remain depressed for some time. On the second-quarter earnings call, Chief Financial Officer Leeny Oberg noted: "The extent of the decline in our business and our expectation that it will take time for demand to return fully require these measures."
It doesn't seem likely that Marriott's hotel business will meaningfully pick up until there are signs that COVID-19 is under control. While everyone is hopeful that a vaccine is produced soon, no one knows about the timing, effectiveness, or distribution.
Until then, the battle against the virus continues, and everyone received a recent reminder of that after the U.K. warned about a second wave. Officials stated that it could bring up to 50,000 new cases per day by mid-October, and London's mayor is considering new restrictions.
Marriott has worldwide operations, but most of its revenue comes from the U.S. However, it is certainly possible that state and local governments could take similar actions to contain the spread if officials find infections are increasing.
To conserve liquidity, Marriott's board of directors suspended the dividend earlier this year.
While the move is perfectly reasonable in light of the current business conditions and an uncertain future, it does mean investors will have to do without a regular payment while waiting for results to improve.
In short, the economic fallout of COVID-19 inflicts too much damage on Marriott's results, and with no concrete timetable for when things will improve, you should place your investment funds elsewhere.