Starwood Stable Despite Uncertain Environment - Analyst Blog

On Jun 09, 2014, we issued an updated research report on Starwood Hotels & Resorts Worldwide Inc. HOT.

On Apr 24, this leading hotelier posted better-than-expected first quarter 2014 results with earnings and revenue beating the Zacks Consensus Estimate. Earnings of 63 cents declined 17.0% year over year owing to a decline in revenues. However, it was higher than management's expected range of 53 cents to 56 cents per share.

Revenues decreased 5.3% year over year to $1.46 billion in the quarter only due to the sale of The St. Regis Bal Harbor residential project in Jan 2014. The sale was a part of the company's asset disposition strategy for greater financial flexibility over the long-term.

Starwood is focused on rebalancing its portfolio by increasing the contribution from managed, unconsolidated joint venture hotels and franchised hotels. Therefore, the company is focusing on its asset disposition strategy that reduces earnings volatility and provides a more stable growth profile.

Despite a year-over-year decline in the top line, margins continued to improve throughout 2013 and into the first quarter of 2014, driven by higher margins in North America and international markets.

Owing to a gradual economic recovery, system-wide occupancies in North America appear to be pretty steady and above the prior peak level achieved in 2006. Further, more than half of Starwood's properties are situated outside the U.S., which gives the company wide international exposure, unlike any of its peers.

Currently, the company has a presence in the majority of cities that account for nearly 40% of global GDP. Their growth will automatically translate into growth for Starwood's brands.

Moreover, the company is eyeing more than 500 middleweight cities that are set to contribute to global growth like the top 100. According to the company, these middleweight cities are growing faster with an increasing influx of people. With an expected rise in global middle class from 2 billion to 5 billion people over the next 20 years, these cities are expected to flourish as well.

However, the lingering political uncertainty in the regions where this Zacks Rank #3 (Hold) company operates is expected to limit sales growth. Despite its immense growth potential and the soccer World Cup in Brazil beginning this month, a deteriorating political situation and a weak economy continue to decelerate overall Latin American sales.

Moreover, tighter credit markets in China, the political turmoil in Thailand, Argentine currency devaluation, unrest in Ukraine, and Russian actions in Crimea have further added to the woes. Further, upcoming elections in Brazil and Indonesia make the situation more unpredictable. Fluctuation in exchange rates further add to the woes.  

Better-ranked stocks in the hotel industry include Wyndham Worldwide Corp. WYN, Intercontinental Hotels Group plc IHG and Marriott Vacations Worldwide Corp. VAC. All these stocks have a Zacks Rank #2 (Buy).