Three months ago, the lodging industry began to report climbing occupancy rates and stronger pricing power after a resurgence of both business and leisure travel. Marriott (NYSE:MAR) got the party started, announcing a 29% surge in earnings on revenues that rose 19%. Two weeks later, Hilton (NYSE:HLT) followed by announcing a 39% spike in earnings, along with the decision to raise full-year guidance. Not to be outdone, Starwood (NYSE:HOT) and Four Seasons (NYSE:FS) reported gains in RevPAR (revenue per available room -- a key industry metric based on both occupancy levels and room rates) of 17% and 22.7%, respectively.
This morning, Marriott again started the earnings parade with a bang, and judging by the company's solid performance across the board, the party isn't ending anytime soon. Improvements were made in all brands, from the economical Fairfield Inn to the luxurious Ritz-Carlton -- news that bodes well for rivals that are scheduled to report later this month. For the quarter, earnings soared 45% to $0.55, or $132 million, on a 9% rise in revenues to $2.3 billion.
North American company-operated RevPAR rose 8.3%, driven by a 4% hike in room rates and a 3% rise in occupancy to 75%. Many of the rooms were filled with foreign visitors, as an influx of U.K. and Chinese guests helped lift the number of international travelers by 21%. Healthy business travel to airport hotels was also encouraging; Marriott is highly dependent on this class, which represents roughly three-fourths of revenues. Internationally, systemwide RevPARs at comparable properties rose 20% (16% on a constant dollar basis), led by growth in the Asia/Pacific region.
With occupancy on the rise, Marriott has had more latitude to raise room rates, and price increases have a far greater impact on the bottom line (nearly three times as much by some analysts' estimates) than a rise in occupancy rates. For the first time since 2001, prices rose faster than occupancy, and they actually accounted for more than half of the RevPAR gains. As a result, profit margins at company-operated properties expanded by 70 basis points in North America and by twice as much internationally.
Much of Marriott's fee income is a function of revenues per available room, and solid RevPAR growth helped drive base management fees (which the company collects for operating hotel properties) 13% higher to $97 million. It also lifted franchise fee income 21% to $74 million and incentive fees by 17% to $21 million.
Aside from the fees, Marriott's timeshare division reported a 25% increase in contract sales and added $34 million to income, despite a scant 1% rise in sales to $299 million. The company's third-quarter results were also fueled by, well, fuel. Despite possible complications arising from an IRS audit, a synthetic fuel partnership contributed $31 million, or $0.13, to the bottom line, four cents more than last year.
Barring a major disruption in travel, pricing power should continue to gradually return, lifting RevPARs, which in turn would drive fee income higher. Going forward, Marriott is anticipating the addition of 25,000 to 30,000 new hotel rooms to the system, after opening 28,000 (both managed and franchised) in the past year. The expansion, along with RevPAR gains of 5% to 7%, is expected to generate nearly $1 billion in fee income. At a stock price of less than 19 times next year's earnings of $2.74 to $2.84, Marriott is worth a second glance.
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Fool contributor Nathan Slaughter owns none of the companies mentioned.
