Joel Greenblatt, Paul Tudor Jones and John Burbank Added this Big-Cap Stock

In this article, let's take a look at Starwood Hotels & Resorts Worldwide Inc. (HOT, Financial), a $14.34 billion market cap company, which operates as a hotel and leisure company which is comprised of a hospitality network of approximately 1,200 full service hotels, vacation ownership resorts and residential developments.

Diversify globally

The company is well positioned to grow in international markets, with strong operations outside the U.S. Two prominent regions include EMEA (Europe, Middle East and Africa) and Asia-Pacific. However, the majority of its revenue came from the Americas.

The company´s business model is somewhat strong due to its high switching costs, which determines strength among its peers, and the increasing return on capital the firm obtained. Starwood Hotels' annualized return on capital (Joel Greenblatt (Trades, Portfolio)) for the quarter that ended in December 2014 was 34.72%.

Two reasons

We are confident about the company´s future mainly for two reasons. First of all, there are favorable macro conditions like better credit conditions or inelastic price sensitivity in high-income travelers. Secondly, RevPAR or revenue per available room might grow at higher rate. It is important to mention that In the last seven years, total, managed, and franchise room growth was above the long-term U.S. industry supply growth.

Revenues, margins and profitability

Looking at profitability, revenues decreased by 0.87%, missing its consensus estimates by 2.1%, but earnings per share increased in the fourth quarter compared to the same quarter a year ago ($1.40 vs. $0.67).The net income increased by almost 83% when compared to the same quarter one year prior, to $234 million from $128 million.

The 3-year average operating margin growth rate was 64.60% per year, which means that it is expanding, and so it is a good sign for the company. Net Margin is at 10.58% and is ranked higher than 84% of the 1,210 companies in the Global Lodging industry.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

The company has a current ROE of 23.46% which is higher than the industry median. Also, it is higher than the one exhibit by Extended Stay America (STAY, Financial), Hyatt (H, Financial), Carnival (CCL, Financial), and Royal Caribbean Cruises (RCL, Financial).

In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. Other option in the industry could be Diamond Resorts (DRII, Financial). It is very important to understand this metric before investing and it is important to look at the trend in ROE over time. Gurufocus provides this information in the last 10 years:

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 24.4x, trading at a discount compared to an average of 55.5x for the industry. To use another metric, its price-to-book ratio of 9.85x indicates a premium versus the industry average of 2.60x while the price-to-sales ratio of 2.61x is above the industry average of 2.07x. The PE ratio indicates that the stock in relative undervalued and subject to a potential buy.

Final comment

Starwood is the world's largest operator of luxury and upscale hotels with about 94% of its hotels managed or franchised in growing markets. Further, the firm´s performance can be seen in the ability to generate an average 30% return on invested capital in the past years.

Further, the PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.

Hedge fund guru Steven Cohen (Trades, Portfolio) has added this stock to his portfolio in the fourth quarter of 2014, as well as Caxton Associates (Trades, Portfolio).

Disclosure: Omar Venerio holds no position in any stocks mentioned