Friday, May 1, 2009

A Stroll Through the Hotel Space

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As all things consumer discretionary continue to jump ever higher [Apr 26: The Meek Continue to Dominate Equities] [Apr 5, 2009: The Meek Shall Inherit the Earth: 92 Stocks Over $10 Returning 60%+] on hopes of recovery in the not too distant future, I thought I'd circle back and look at some of the major hotels who just reported to see how they are doing. At this point all hotels are blessed - no worries about debt [Jan 27, 2009: As Hotel Vacancies Rise, So Do Risks of Default] [Nov 27, 2008: AP - Malls, Hotels Next Victims in New Mortgage Crisis] no worries about a weak consumer staying home and doing "staycations" - the Bernanke house ATM is back on, and feel free to move about the cabin.

Much like the multiple premature consumer discretionary rallies in 2008, this is "the playbook" and no matter what the reality is down the road, this whole sector is being bid up under the guise of ignore news now because the Oracle that is the market can see the future. It was wrong multiple times in the past; will it be correct this time? First, I don't know and second, it does not matter - as long as the herd is doing you, you can profit. Simple as that.

We last looked at this group in the January piece above, so I am going to circle back and look at Marriott (MAR),[Marriott, Ritz-Carlton, Residence Inns] Starwood Hotels (HOT) [Westin, Sheraton, Four Points], Wyndham Worldwide (WYN) [Ramada, Days Inn, Super 8] and Choice Hotels (CHH) [Quality Inn, Comfort Inn, Econo Lodge] - this gives us a good cross section of economic price points. Recall in previous recessions you could stick with the top end players because the well heeled were recession resistant, while the sludge of the Earth (peasantry) took the hits in the economy. This time not so much - we're all having fun together. RevPar is the key "measuring stick" in this sector (revenue per available room), and the higher end chains also do a lot of work in timeshares. And like almost every company beating the numbers it's "chop chop chop" across the expense line (mostly labor).

I know valuation does not matter to eager bulls who buy stocks at any price but I posted the forward PE at current estimates (which of course could be too high or too low) next to each name... as you mock my use of PE multiples as a useful tool remember this is a suffering industry showing shrinkage or at best "flattish" growth for the next year or two. If you believe in a grand consumer recovery, then I suppose you can add 15, 20, 25% to analyst estimates for 2009 and reduce the PE by an offsetting amount. These are not trailing... these are forward PEs

First we start with Marriott @ 26x forward PE, (Marriot has $3B in debt.) via AP and Reuters
  • Hotel operator Marriott International (MAR) reported a smaller-than-expected quarterly loss on Thursday, helped by sharp cost cuts and signs of stabilizing demand. The company, which operates the Marriott, Ritz Carlton, Renaissance hotels, said its net loss was $23 million, or 6 cents per share, compared to a year-earlier profit of $121 million, or 33 cents per share. Excluding $129 million in pretax restructuring costs, the company earned 24 cents per share in the quarter, beating analyst estimates of 14 cents, according to Reuters Estimates. (remember restructuring costs don't count in American accounting, because its 1x and not "real" hence should not count against the company)
  • Revenue fell 15 percent to $2.5 billion.
  • First quarter results were hurt by a nearly 20 percent drop in worldwide RevPAR. For the second quarter of 2009, the company expects North American RevPAR to drop 22 percent to 25 percent and international revenue to decline between 17 percent and 20 percent.
Now for the magic words, have the CEO say "stabilization" and then lets look for the 2nd derivative improvement - i.e. getting worse at a slower pace.
  • Despite the global slowdown, the company said it has seen a stabilization or slowing decline in its booking trends. Gross trends for corporate or package bookings were leveling off and new bookings were falling at a slower rate.
  • "There are some initial signs of demand stabilization even if that today is at very low levels," said Chief Financial Officer Arne Sorenson.
Magic.
  • The company, which operates 3,200 lodging properties worldwide, has battled lower demand by driving down room rates and cutting general and administrative costs 16 percent in the first quarter. (chop chop chop) North American management wages fell about 10 percent during the quarter. "The full-year EPS guidance would have been worse if not for aggressive corporate cost savings," FBR Capital analyst Patrick Scholes wrote in a note.
  • In the first quarter, Marriott trimmed costs by shutting restaurants, cutting hours and trimming menu options. It cut hours at its retail stores and at some hotels, temporarily closed floors.
  • The company lowered its adjusted earnings to between 20 cents and 23 cents per share in the second quarter, but said it was unable to provide a full-year outlook owing to the business environment. (once more, the company cannot see the bright future, but market speculators can)
  • Robert LaFleur of Susquehanna Financial Group said the company "did an exceptional job of wringing costs out of its operations in the quarter."
  • Still, Sorenson said while demand may have bottomed, "there is still a risk in pricing and therefore RevPAR," referring to an industry-wide metric of profitability. "Room rates are likely to remain weak until the economy shows improvement," Sorenson said.
  • Marriott said it saw a 31 percent drop in revenue from its 68 timeshare properties, resulting in a $17 million loss as well as a 9.3 percent drop in revenue in its 100 luxury properties, leading to a $22 million loss.
  • Deutsche Bank analyst Chris Woronka also said the company's outlook "confirms that fundamentals remain very weak and visibility low."


Next onto Starwood Hotels (HOT) @ 23x forward PE, (Starwood has $3.8B of debt) via Reuters
  • Starwood Hotels & Resorts Worldwide (HOT), operator of the W, Sheraton and St. Regis chains, reported a better-than-expected quarterly profit on Thursday as cost-cutting offset dwindling demand.
  • The world's No. 8 hotel group by rooms reported a net profit of $6 million, or 3 cents per share, compared with $32 million, or 17 cents per share, a year earlier. Excluding restructuring and other charges, Starwood reported earnings of 14 cents a share, far above analysts' average forecast of 3 cents, according to Reuters Estimates. (once more, restructuring charges don't count, otherwise the entire stock market would look far more expensive - it's "1x" and hence doesn't count)
  • But total revenue fell 23.7 percent to $1.1 billion, hurt by weakness in luxury brands and abroad. "For the first time in a while our traditional strengths have, for now, become significant headwinds," van Paasschen said during the call. (translation: we cater to the well off which used to matter in previous slowdowns - this time around even they are being hit)
  • Starwood relied on sharp cost-cutting to beat Wall Street forecasts. Starwood's costs and expenses fell nearly 20 percent in the first quarter. The cuts were essential for Starwood, which saw RevPAR for company-operated hotels worldwide fall 24.3 percent from the year-ago quarter. North American company-operated RevPAR fell 24.9 percent. "RevPAR will continue to be challenged for the balance of the year as rates, if not occupancy, continues to be under pressure," Chief Executive Frits van Paasschen said during a call with analysts.
  • RevPAR was "significantly below expectations," Barclays Capital analyst Felicia Hendrix said in a research note, hurt by a stronger dollar and its luxury segment. Starwood has six luxury brands and more than half its rooms are abroad.
  • Still the earnings beat boosted investors' confidence in the hotel sector, said Patrick Scholes, an analyst for FBR Capital Markets. "Positive investor sentiment is trumping fundamentals right now," he said. (and that pretty much sums it up!)
Guidance?
  • Starwood said it expects second-quarter earnings per share of 14 cents to 20 cents excluding special items.
  • Citing "significant uncertainty" in the global economy, it said it would be difficult to provide any definitive outlook for the second half of the year. (sounds familiar but not to worry, the stock market knows all and is the efficient discounting mechanism)
  • The company said full-year RevPAR was tracking 6 percentage points below the baseline scenario the company discussed in its January earnings conference call. (time for more chop, chop, chop)

Allright, those are the two high end joints - let's look down at where the common folk of America sleep when on the road.

Next, is Choice Hotels (CHH), almost reasonable (relatively speaking) @ 19x forward PE, via AP and Reuters. As the chart at the bottom shows its reasonable valuation must of been the cause of shorts NOT piling in and hence no short squeeze like the others. Only a few hundred million of debt. Via AP and Reuters
  • Budget hotel chain operator Choice Hotels International Inc (CHH) posted higher-than-expected quarterly results, as cost-control efforts offset lower spending by consumers and corporations, but its second-quarter profit outlook lagged market view. (starting to sound familiar - yet company after company seems to rise on the same ole news)
  • For the first quarter ended March 31, the company posted a profit of $16.3 million, or 27 cents a share, compared with $18.6 million, or 29 cents a share, a year earlier. (what? no restructuring costs to beat the analysts estimates by a much larger amount? cmon now management - play the Wall St game! A missed opportunity indeed) Analysts on average were expecting earnings of 25 cents a share, before items, on revenue of $113.3 million, according to Reuters Estimates.
  • Revenue fell 11 percent to $114.2 million.
  • The company's domestic system-wide revenue per available room (RevPAR), a key gauge of hotel performance that reflects rates and occupancy, fell 10.3 percent in the quarter. It expects second-quarter RevPar to fall 16 percent.
Guidance
  • Choice Hotels expects second-quarter earnings of 41 cents a share compared with analyst estimates of 43 cents a share.
  • $1.68 (v analysts $1.62)
So the only company of the three thus far to offer full year guidance, they had the lowest RevPAR drop - but get little reward in the stock. Missed an opportunity to throw a lot of restructuring items into this report, and chase out shorts by attracting the longs who never open an earnings report but respond within milliseconds to "headline beat". The company also has little debt (relatively) - obviously this management needs to be replaced (facetious) because they do not know how to sandblast shorts by going heavy into debt, and play the "restructuring" game.

Last, the fun one and while some of these luxury guys put in 100% gains since the March low - that's nothing. I wish I had been prescient enough to put my chips on Wyndham Worldwide (WYN) - I need to go figure out why they were so low but (perhaps the $3.8B in debt but debt seems to not be a problem anymore for any bull) as the forward PE is only 7ish even after the monster run off the lows. I have not followed the story with this company that specifically so I am curious what the threat to life was in February. Via AP and Reuters
  • Wyndham Worldwide Corp (WYN) reported a better-than-expected quarterly profit on Wednesday, helped by broad cost cuts, particularly in its time-share business, sending its shares up 38 percent.
  • The world's biggest time-share operator posted a first-quarter net profit of $45 million, or 25 cents a share. A year ago, the former Cendant Corp unit posted a net profit of $42 million, or 24 cents a share. (now that's impressive - flat year over year) Excluding restructuring costs, earnings were $74 million, or 41 cents per share. Wall Street analysts on average were expecting 36 cents a share, according to Reuters Estimates. (aha! restructuring costs - they don't count aka broken record)
  • Wyndham said revenue dropped 11 percent to $901 million, hurt by faltering demand and the impact of a stronger U.S. dollar. Analysts had expected first-quarter revenue to be about $825.6 million, according to Reuters Estimates.
  • Sales in the time-share business fell 39 percent, driven by Wyndham's efforts to reduce properties in that segment. The company has roughly 7,000 properties and 21 percent of its rooms are abroad.
  • Total expenses fell 12.4 percent from a year ago with the most significant cost cuts coming from Wyndham's vacation time-share business, where the company had to cut "a large number" of marketing and sales employees, Holmes said.
  • "We've cut costs everywhere," Wyndham Chief Executive Steve Holmes said in an interview with Reuters. "We run a fairly lean shop to begin with but in an environment like this we have to take a look at everything."
  • In its hotel group, revenue per available room -- a key gauge of a hotelier's performance -- fell 11.3 percent, excluding the impact of foreign currency.
Say the magic words Mr. Holmes... say them.
  • "We do see signs that there is less pressure," Holmes said
Magic! 2nd derivative improvement endorsement achieved!

Guidance?
  • The company said it expected second-quarter adjusted earnings to be between 36 cents and 41 cents and reiterated its full-year earnings outlook. Wyndham reaffirmed its guidance for the full-year 2009. The company continues to expect adjusted earnings between $1.61 and $1.85 per share and revenue of $3.5 billion to $3.9 billion.
  • At the Reuters Summit in March, Holmes said worldwide revenue per available room (RevPAR) would fall between 6 percent and 10 percent. (not too shabby) "Based on what we saw in the first quarter, we probably lean toward the 10 percent than the 6 percent decline," he said. "We're seeing a continuation of pressure." (shhh... wrong words - have to destroy the short; you know what to say next)
Wait?? Just a few sentences ago you said "continuation of pressure". Ah, not to worry - bulls can ignore one statement, and listen to the other - its called seeing green shoots and glimmers of hope.

Problem?
  • On Tuesday, Moody's Investor Services cut Wyndham corporate credit rating two notches into junk status on expectations that weak demand would pressure earnings into 2010.
No problemo. Debt does not matter to the new breed bulls - the Federal Reserve will suck up all debt and make sure all our problems go away into the night. So the weakness a few months ago must of been when silly investors still thought debt was obligation of individual companies, and not the US taxpayer. As I noted a few weeks ago we now live with a Federal Reserve will buy anything and everything and stuff it on their balance sheet environment - so where we once had to worry about such things as bad debt... now lobbyists go and meet with the Fed and get what they need. Right commercial real estate lobby? All the problems will now go to the taxpayer and corporate American can live free of worry again.

Magic.

To exploit this fact that Uncle Ben can act like a Hoover and suck up all debt and take the losses in the future when people's attention is focused on the recovery of 2011.... Wyndam is looking mighty fine as an investment vehicle.
  • "We sense there had still been considerable skepticism about the sustainability of Wyndham's timeshare earnings heading into the report," said Deutsche Bank analyst Chris Woronka in a note to investors. "We think the main question now is, after right-sizing the business for a severe downturn, will Wyndham be able to "re-grow" its businesses accretively in a recovery?"
No worries there- we'll find out "in 6 months" as the US economy returns to paper printing prosperity (P cubed); shower us with fiat money Ben... shower us.
  • Goldman Sachs analyst Steven Kent expressed some surprise that Wyndham did not lower its guidance, in light of further deterioration in the overall economy. "However," he said, "this could be a sign of the strength in Wyndham's overall business model, but mostly in the stable franchising and vacation exchange and rental businesses."

No positions but chomping at the bit at Wyndham if the market is ever allowed to go down again for more than 3 hours per government/Goldman Sachs decree

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