MAR Marriott International Inc

We have recently downgraded our rating on the shares of  Starwood Hotels & Resorts Worldwide Inc. (HOT) to Neutral from Outperform due to a slowdown in 2012 RevPAR growth target in North America, weak EBITDA projection as well as weakness in certain international markets.

We were impressed with Starwood’s outperformance in the recently concluded fourth quarter of 2011. The strength of the namesake brand allows the company to charge a premium for its hotel rooms.  Moreover, the company is in a steady expansion mode. Starwood has over half of its hotel properties outside the U.S., an international exposure that not many of its peers can boast of. Starwood will open 80 new hotels in 2012, with 75% of them being outside North America, primarily in the faster growing Asia (60.0%). The company’s balance sheet also remains in good shape.

However, although we believe that Starwood is well positioned for the long term, we expect the operating environment to weaken in the near term before improving. In the developed markets, unemployment remains extremely high and the pressure of public and private debt is mounting, leading to a slower pace of recovery. Management expects lodging recovery in North America to be slower in 2012 than 2011.

Exchange rate shifts will negatively impact Starwood’s hotel business in 2012. EBITDA will be hurt by approximately $7 million net of benefits from Euro hedge. Additionally, there are several Starwood properties awaiting renovations in 2012. Hence, 2012 renovations and the hotels sold in 2011 will adversely impact the company’s total owned EBITDA by $10 million.

To add to the worry, there is the Eurozone debt crisis. RevPAR was flat in Europe in the fourth quarter of 2011 due to the austerity measures and fragile economic conditions in Europe. Management commented that softness in demand will likely loom in future, despite the adoption of crucial measures in resolving the crisis. Deceleration in European RevPAR is a cause of concern given Starwood’s considerable exposure to that region.

The other geographies are also not in a very good shape. Unrest in Middle East and Africa as well as the Korean Peninsula remains another area of apprehension. In Japan, although occupancies recovered well from early 2011, revival of average daily rate was still down compared to the pre-earthquake level. In fact, China, Starwood’s one of the strongest hubs, targets economic growth of 7.5% in 2012. It is the slowest rate since 2004.

Moreover, we believe all the positive attributes in the stock are reflected at the current level. Hence, in light of the current state of industry fundamentals, we recommend investors to remain on the sidelines.

Starwood, which competes with the likes of Marriott International Inc. (MAR) and Wyndham Worldwide Corporation (WYN), currently retains the Zacks #3 Rank that translates into a short-term Hold rating.

 
STARWOOD HOTELS (HOT): Free Stock Analysis Report
 
MARRIOTT INTL-A (MAR): Free Stock Analysis Report
 
WYNDHAM WORLDWD (WYN): Free Stock Analysis Report
 
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