To really understand a stock, you just have to get down and dirty, break out your pencil, and really weigh the risk versus reward potential of the company you're following. I propose we take a closer look at the good and the bad at Starwood Hotels & Resorts
Starwood operates nearly 1,000 hotels, mostly located in the U.S., and has greatly benefited recently from a weaker dollar. A weak dollar makes foreign currencies like the yen and euro stronger, which in turn gives greater buying power and travel incentive to foreigners heading to the United States. This translates into the holy grail of all hotel figures, the revPAR, or revenue per available room, heading higher by 10% in the most recent quarter. Occupancy rates may not be back at 2007 levels, but a double-digit revPAR increase is impressive and shows that high-end consumers are spending.
Despite Starwood's recent success in driving business and paying down more than $1 billion in debt over the last year, it is still drowning in debt. According to its latest quarterly report, it is carrying about $2.8 billion in long-term debts with more than $1 billion due between 2012 and 2014. Interest expense payments have the chance to cripple cash flow beginning as early as 2012, which could allow rivals like Hyatt
Starwood has regained some of that pizzazz that made it a popular play in the lodging sector prior to the 2007 market meltdown. As long as the dollar remains weak, foreigners should continue to vacation in the U.S. and Starwood should continue to grow its revenues in the mid to high single digits.
On the other hand, Starwood's debt could become a real issue in the next two years, and we know that the dollar can't go down indefinitely. Starwood is trading at roughly 37 times forward earnings and five times book value, both levels considerably higher than its historical average. At this point I'm inclined to stay away until either growth picks up to match these valuations or debt levels drop considerably.
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Sean Williams does not own shares in any companies mentioned in this article. You can follow him on CAPS under the screen name UltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.