The market liked what it saw in hotel operator and franchisor Marriott's (NYSE:MAR) earnings release last Thursday, sending the stock from about $38.50 the day before the release to $40.55 currently. The stock has had an even stronger run over the past five years. Don't fight the ticker tape, they say on Wall Street, but I'm currently fighting the cash flow trends.

For the third quarter, revenue per available room, or REVPAR in industry speak, increased 9.4% on a global basis and 8.6% at Marriott's North American properties. However, total lodging revenue for the quarter grew only about 3% but lodging operating income advanced 34%. And earnings of $0.33 per diluted share were ahead of most analyst projections. The company also repurchased $451 million in stock and has bought back a cool $1.1 billion year to date.

For the fourth quarter, management expects REVPAR growth of 7.5% to 8.5% and fee revenue growth of 13% to 16%. For fiscal 2007, it expects REVPAR growth of 7% to 8%, total fee revenue of $1.36 billion to $1.38 billion, and diluted earnings from continuing operations of $1.78 to $1.88. Based off the share price as of this writing, that's a forward P/E of 21 to 23.

Brands by business segment

Full-service lodging

  • Marriott Hotels & Resorts
  • Marriott Conference Centers
  • JW Marriott Hotels & Resorts
  • The Ritz-Carlton
  • Renaissance Hotels & Resorts
  • Bulgari Hotels & Resorts

Extended-stay lodging

  • Residence Inn by Marriott
  • TownePlace Suites by Marriott
  • Marriott ExecuStay
  • Marriott Executive Apartments

Select-service lodging

  • Courtyard by Marriott
  • Fairfield Inn by Marriott
  • SpringHill Suites by Marriott


  • Marriott Vacation Club International
  • The Ritz-Carlton Club
  • Grand Residences by Marriott
  • Horizons by Marriott Vacation Club

Marriott's business segments consist of full-service, select- -- or limited- -- service, extended-stay, and timeshare properties. Full-service accounted for 66% of total third-quarter 2006 sales; select made up 12%; extended made up 6%; and timeshare accounted for 15%. Synthetic fuel accounted for less than 1% of sales and appears to exist so Marriott can qualify for certain tax credits.

In total, as of the end of last year Marriott operated 1,017 properties with 262,000 rooms and owned 17 properties with 5,317 rooms. It earns most of its money from base fees for managing properties which are based off of a percent of revenues. It earns upside from incentive fees which are based on how profitable a hotel is.

Seeing as Marriott avoids the costs of running and maintaining the real estate associated with its hotels, I initially expected free cash flow and subsequent returns on invested capital to be higher with less capital on the balance sheet. The figure has come in close to 14% over the past year but has averaged only about 5% over the past several years. And while total sales have advanced in the double digits over the past couple of years, operating cash flow has been more uneven, as has free cash flow generation. And with literally 20 financial exhibits in the press release, I'm a bit perplexed as to why a full balance sheet and a statement of cash flows weren't also included.

Overall, I expected more in terms of consistent cash flow generation at Marriott, but the stock has had an impressive run over the past five years, having appreciated more than 200% over that time frame. The stock is a little pricey for me given what I've seen so far, but I'll check out competitors such as Hilton (NYSE:HLT), Four Seasons (NYSE:FS), InterContinental (NYSE:IHG), and Choice Hotels International (NYSE:CHH) before throwing in the towel on Marriott and some hotel exposure in my portfolio.

For related Foolishness:

Hilton Family Hotels is a partner of the Foolanthropy 2006 campaign, which starts with a call for nominations Oct. 16.

Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.