Marriott International: Appealing Valuation, Notable Performance

Concern that June’s positive three-year RevPAR growth message is already being tempered by lower guidance for 2013 is nit picking. The difference is modest and within a margin of error. Importantly, it is driven by macro forecasts rather than actual trading slowdown (“steady as she goes”) and 5-7% targeted yield gain remains creditable. Q3 results were fine and strong finances back Marriott International’s (MAR) spirited commitment to share buybacks, which should curb downside risk.

Q3 results: Surprise efficiencies bolster solid trading
Fee income (+11%) and RevPAR (+6.0%) continued to deliver impressively and to plan, even if the latter was only just within worldwide guidance of +6-8%. The flagship Marriott brand in North America was a notable performer (rate-driven +7%), while Europe’s 4% yield rise was boosted by the Olympics and Euro 2012. G&A expenses were much lower than expected owing to energy savings and general efficiencies, thus reversing their excess in Q2. This and vigorous share repurchases ($353m after $550m in H1) helped to drive EPS c 10% ahead of guidance.

Optimism prevails, and with reason
The slight slowdown anticipated for Q4 looks reasonable and is not enough to disturb full-year RevPAR guidance, while any EPS shortfall should be made good by its excess in the year to date. For 2013 the signs are good for North America, Marriott’s main profit centre (c 75%), with a continued favourable supply situation and both group revenue for the flagship brand and corporate rates set for high single-digit growth. Europe may lag on macro grounds and lack of special events but is under 10% of group fee income and RevPAR there should still be “flattish”.

Valuation: Appealing
Despite recent price underperformance we reiterate that Marriott’s rating (c 12x 2013 EV/EBITDA) is undemanding, given the strength of its fee-based model, finances and brand equity. Multiple expansion as a pure lodging play is likely after the Timeshare spin-off and bold returns of capital should be rewarded.

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