Fairmont Hotels (NYSE:FHR), a Motley Fool Hidden Gems recommendation, is a company in transition.
Originally one of the crown jewels of railroad company Canadian Pacific (NYSE:CP), Fairmont got its independence in September 2001, when Canadian Pacific split into five separate companies -- giving investors the opportunity to own some of the world's finest luxury hotels that some had labeled "hidden assets."
Fairmont has taken steps to monetize its hidden wealth. In 2001, it sold the Fairmont Express in British Columbia and the venerable Fairmont Le Chateau Frontenac in Quebec City for more than $200 million -- and then signed a 50-year management contract that will keep these properties earning money for Fairmont. It repeated that process in 2004, when it sold the Kea Lani in Maui and Glitter Bay in Barbados for almost $400 million.
That cash has allowed Fairmont to differentiate itself financially. While Starwood (NYSE:HOT) and Hilton (NYSE:HLT) carry cash debt loads that are 80% and 89% of annual revenue, respectively, Fairmont's debt load rests just above 50% of revenue. In a cyclical business such as hotels, it pays to be conservative.
Saying its assets may be "more appropriately owned by someone else," the company is signaling that it is willing continue to harvest its hidden wealth -- and trade that ownership for long-term hotel-management fees and expansions into new markets (such as the recently announced five-hotel deal in Kenya).
The company's recently announced second-quarter results reported that revenue, after netting out real estate transactions in 2004, increased by a strong 13% over last year's comparable quarter. Net out real estate transactions from diluted earnings per share, and they are up an even stronger 24%.
Holding the stock down this morning is the company's EBITDA (earnings before interest, taxes, depreciation, and amortization) predictions for the third quarter. Weak U.S. bookings for its Canadian hotels are dampening the company's expectations for 2005. Earlier guidance of EBITDA of between $185 million and $195 million has now been lowered to $175 million, both excluding any benefits from real estate transactions.
That's to be expected, though, with things being cyclical. The company's outlook is affected by U.S. travel to Canada, which in the short term is affected by the Canadian dollar's appreciation against the U.S. dollar. The point is that Fairmont is very well-positioned as it looks toward the future. It holds some very valuable properties, and its recent sales have positioned it to enjoy some very high-margin revenue in the form of management fees -- a trend that will bode very favorably, provided Fairmont continues this activity.
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Fool contributor W.D. Crotty does not own shares in any of the companies mentioned -- although W.D. has been in the Fairmont hotels in Banff Springs, Lake Louise, and Quebec City. Click here to see The Motley Fool's disclosure policy.
