HOT Spin-Off Turns Morgan Stanley On

Morgan Stanley released a research note on February 12, updating its views on Starwood Hotels & Resorts Worldwide Inc HOT.

MS bull case: PT of $120 assumes 15.4x 2016E EBITDA ($1.410 billion) - "Improving Global Economy drives strong RevPAR beat, unit growth re-accelerates."
MS base case: PT of $87 assumes 13.4x 2016E EBITDA ($1.245 billion) - "Strong Industry Fundamentals, though Some Weakness Int'l."
MS bear case: PT of $65 assumes 11.6x 2016E EBITDA ($1.113 billion) - "Stuttering Economies Drive Below Range RevPAR Growth, Unit Growth Slows Further."

Starwood 5 to 7 percent CC 2015 RevPAR guidance is now in line with peers Marriott International, Inc. MAR and Hilton Worldwide Holdings, Inc. HLT.
Starwood's group business had strongest booking month ever in December 2014.
MS expects that operating leverage from Starwood's owned segment leads EBITDA estimate to high-end of guidance.
Notably, Starwood has beaten the high-end of quarterly EBITDA guidance for nine quarters in a row.

MS noted in the past Starwood has been inconsistent with buybacks ($0 Q1 2014) and asset sales ($0 Q3 2014); without guidance.
Now Starwood provided guidance and is executing on both:
Starwood has already repurchased $75 million of stock, ($300 - $350 million annual guidance).
Starwood gave guidance of ~$800 million of asset sales, (several hotels are already on the market).
Spin-off of timeshare business and sale of hotels should "drive the market to properly value these segments."

Macro-economic challenges do not improve, leading to softer global demand.
Foreign exchange (FX) headwinds (Starwood has 50 percent international exposure vs. Marriott/Hilton ~20 percent).
Cost pressures - (healthcare, insurance and property taxes) limit margin increases/incentive fee gains.
Recent underperformance of "luxury/upper upscale U.S. hotels."

Starwood's annual dividend is currently $1.50 per share.

The MS 16 percent base case gain assumes 14.1 percent price appreciation in shares, plus the dividend.

Image credit: Russavia, Wikimedia

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