Since any incremental increases to RevPAR trickle down to net income nearly untouched, Marriott's earnings estimates seem correct -- if RevPAR does increase. But this is where the issues with Marriott begin.
While the top executives at Marriott tell investors one thing, a recent survey compiled by Horwath Hotel, Tourism and Leisure, the world's largest hospitality consulting firm, tells a different story. The survey shows that hotel operators' sentiment worldwide is at its lowest level since the start of 2010 and on the verge of turning negative. The survey gives the hotel industry a brief overview of expected market conditions.
The results indicated that "the first half of 2012 failed to meet hotel operator expectations." Whether this is due to expectations being set too high, or global economic problems causing issues, the point stands: They haven't hit goals and they are not very confident moving forward. The survey goes on to say that "hoteliers [were] slightly more disappointed with occupancy levels than average room rate performance."
Marriott recently posted RevPAR increase of 6.7% in the second quarter compared to the same time frame last year. Now, in order for RevPAR to increase, occupancy and/or average daily room rate must increase. Horwath's survey indicates that room rates have been driving RevPAR growth. But with sluggish U.S. and euro-area economies, how much higher can hotels push room rates?
Furthermore, compared to the S&P 500's current P/E of 16, Marriott's share price of $37 is on the more expensive side. After accounting for a one-time non-cash impairment charge the company took last September related to its now-separate timeshare business, Marriott has a P/E of 30. Starwood Hotels & Resorts
As Marriott is one of the largest hotel companies in the world, if it realizes the RevPAR growth it's predicting, one would be foolish to think that every other major hotel company wouldn't also enjoy similar growth. But because Marriott's share price is more expensive than its competitors, if all predictions come true, Marriott's future price appreciation will be limited. Alternately, there will a prolonged period of price stagnation while earnings play catch-up with the price. On the other hand, if industrywide RevPAR growth fails to meet expectations, Marriott's pricier stock has further to fall.
Since Marriott has the highest P/E, we would expect it to also have the highest future growth prospects in terms of increasing its hotel and rooms counts. Marriott currently has 115,000 rooms worldwide under construction. That is 17% of existing inventory in its system. Starwood, on the other hand, has a pipeline that consists of 30% its current room count, and Wyndham is slightly better than Marriott with 18% of its current room count under construction.
Lastly, Marriott's dividend of $0.52, a yield of 1.4%, gives the company a payout ratio of 35%. Although Starwood's $0.50 dividend and 0.90% yield are less than Marriott's, its 17% payout has more room to grow in the future. Wyndham pays $0.92 per share or a 1.8% yield, still while only paying out 30% of net income. Choice Hotels' 37% payout ratio equals a $0.74 dividend, for another 1.8% yield, giving it only a slightly higher payout ratio but a nice bump up in yield compared to Marriott.
Due to the worldwide economic slowdown, an inflated P/E ratio, and the presence of other safer, more profitable investment opportunities within the hotel industry available to investors, I am reiterating my bearish CAPScall on Marriott. Add Marriott to your watchlist to find out if the company meets the goals it has set.