Reasons to Consider Marriott in Your Portfolio

In this article, let's take a look at Marriott International, Inc. (MAR, Financial), a $17.93 billion market cap company, which operates more than 3,500 hotels and 600,000 rooms in more than 50 countries.

Business model

Marriott has an interesting recurring-fee business model which is characterized by having returns over its invested capital and high switching costs for property owners in its network.

Almost all the hotels (98% or more) are franchised or managed hotels, generating more than 80% of cash flow. In general these hotels have long-term contracts, about 10 to 30 years.

Property owners can face high switching costs in case they exit the firm's system. For example, reconfiguring a hotel to meet the requirements of another brand is not easy and costless.

Network effect and future thoughts

As the number of travelers in its network increases, it attracts more property owners who want to benefit.

We expect a growth in revenue per available room of a minimum of 5% for this year and next. Growth in part will be helped by limited room supply growth in North America and Europe.

Major risks

The major risk that Marriott faces is that North American hotels generate more than 80% of hotel revenues. This means that it is highly exposed to an economic downturn in North America. Other risks include risks common to all companies in the industry, such as terrorism, waror epidemic diseases. When thinking about international properties, which represent about 20% of consolidated sales, we see political and currency exchange risks, too.

Revenues, margins and profitability

Looking at profitability, revenue grew by 6.77% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.64 vs $0.52). During the past fiscal year, the company increased its bottom line. It earned $2.01 versus $1.72 in the previous year. This year, Wall Street expects an improvement in earnings ($2.52 versus $2.01).

Finally, let´s see a measure defined by Joel Greenblatt (Trades, Portfolio): the Return on Capital, which he analyzed it differently in his book “The Little Book That Still Beats the Market (Little Books. Big Profits)”. He defined Return on Capital as EBIT divided by the total of net fixed assets and net working capital.

The formula is: Return on Capital: EBIT/(Net Working Capital + Net PPE – Excess Cash)

So, let´s compare the ROC which is one of the most important measures of the efficiency of a business and should be an important tool for investors.

The ROC is higher than 93% of the 867 companies in the industry, including Hyatt Hotels (H, Financial), Wyndham Worldwide (WYN, Financial) and Diamond Resorts (DRII, Financial). During the past 13 years, Marriott International Inc's highest Return on Capital (Joel Greenblatt (Trades, Portfolio)) was 69.45%, the lowest was -7.28% and the median was 32.69%.

It is very important to understand this metric before investing and it is important to look at the trend in ROC over time.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of28.2x, trading at a premium compared to an average of 27.8x for the industry. To use another metric, its price-to-sales ratio of 1.43x is below the industry average of 1.66x.

As we can see in the next chart, the stock price has an upward trend in the five-year period.

In the last year the share price has jumped by 56.44%.

Final comment

As outlined in the article, the hotel industry is benefiting from higher demand; and we believe Marriott is well positioned to achieve interesting growth in the next years. Further, the returns on invested capital that have averaged more than 26% the past five years, make me feel bullish on this stock.

Hedge fund gurus like Ken Heebner (Trades, Portfolio) and Tom Gayner (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned