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Marriott Earnings Climb as Starwood Merger Looms

By Dan Caplinger - Feb 17, 2016 at 7:19PM

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The hotel operator continued to grow its network and sees a promising future ahead.


Image source: Marriott.

Increasingly, companies have looked in the merger and acquisition arena to find growth as the economy worldwide slows. Hotel giant Marriott's (MAR 0.57%) bid to buy rival Starwood Hotels & Resorts (NYSE: HOT) in a $12.2 billion deal would create the world's largest hotel company, giving it 1.1 million rooms in 5,500 hotels across over 100 different countries. Yet Marriott is still working to grow even before its merger is complete, and coming into Wednesday's fourth-quarter financial report, its investors were hoping that the hotelier would be able to keep producing respectable increases in key metrics. Results were solid, and the company remains excited about its future. Let's look more closely at the latest from Marriott and how it expects 2016 to go.

Marriott gives investors cozy results
Marriott's fourth-quarter results came through where it counted. Revenue climbed 4% to $3.71 billion, which was almost exactly on target with what investors had expected to see. Net income inched upward by 3% to $202 million, but a big drop in share counts produced earnings of $0.77 per share, a penny above the consensus forecast among investors.

A closer look at the metrics reveals some encouraging signs. Revenue per available room for comparable properties rose 3.8% on a constant currency basis, and the strong dollar only cost the company 2 percentage points on comps. Performance in North America was above the system average, producing currency-neutral gains of 4% due largely to strength in average daily rates. Full-service hotels outperformed limited-service alternatives. Internationally, constant currency comparable RevPAR climbed 3%, although Marriott suffered 7.5 percentage points of dollar headwinds in its international business.

From a revenue perspective, gains in base management and franchise fees offset a small decline in incentive management fees at Marriott. Strength in North America was offset by weaker results in the Middle East and Africa.

Marriott continued to broaden its property portfolio. The company added 71 new properties and almost 11,000 rooms to its network, and at the end of 2015, the company sported more than 4,400 properties and timeshare resorts with more than three-quarters of a million rooms. Moreover, its current development pipeline of almost 1,700 properties had the potential to add another 270,000 rooms.

CEO Arne Sorenson declared 2015 a success for Marriott. "We are encouraged by recent demand trends," Sorenson said, pointing to double-digit increases in new group bookings for future business. Marriott expects to be able to boost prices while still maintaining solid occupancy rates, and the company's return on invested capital of 49% is extremely impressive.

What's ahead for Marriott?
Marriott's outlook for the first quarter wasn't extraordinary. The hotelier expects comparable RevPAR to rise 2% to 4%, with the move of the Easter holiday from April last year to March this year producing some challenges in comparisons. Fee revenue should rise 4% to 6% from year-ago levels, but Marriott expects lower relicensing fee revenue as well as further currency-related weakness.

For the full year, Marriott is calling for comps of 3% to 5%, with room additions of 7% worldwide. Fee revenue should land between $1.995 billion and $2.045 billion, up 7% to 9% from 2015 levels. It hopes to see incentive fees climb 10% to 15% on an overall rebound for the company, and it called for earnings gains of 17% to 23%.

Yet much of Marriott's guidance doesn't include the impact of the Starwood acquisition. If it goes through, the combined Marriott and Starwood could potentially enjoy huge economies of scale, boosting earnings by the second year after the merger and taking advantage of some opportunities to work together rather than as competitors. As Sorenson said back in November, "The driving force behind this transaction is growth," and Marriott expects to be more attractive to owners and franchisees as a result of the deal.

Marriott investors weren't immediately happy about the results, sending the stock down 3% in after-hours trading following the announcement. But if the Starwood deal goes through, Marriott could become an absolute giant, and the leverage that would come with the deal could give the combined Marriott and Starwood competitive advantages that will make it the envy of the hotel industry going forward.

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