Canaccord Genuity: Buy This 'HOT' Stock
Last Thursday, Canaccord Genuity analyst Ryan Meliker published a report titled "Opportunity knocks: Risk reward skew is very attractive," and reiterated his Buy rating for Starwood Hotels & Resorts Worldwide Inc (NYSE: HOT).
While noting Starwood's recently-announced disappointing Q2 results on RevPAR growth and reduced FY 2015 guidance, Meliker believes the near-term catalyst for Starwood Hotels & Resorts shares remains the ongoing review of "strategic options."
He feels that Mr. Market is discounting the likelihood of Starwood being acquired, after the InterContinental Hotels Group PLC (ADR) (NYSE: IHG) threw cold water on the idea that it was actively pursuing a merger.
Tale Of The Tape: 'Flash In The Pan'
"The stock traded up yesterday on news that HOT was in merger talks with IHG, but then closed down 5.4 percent on IHG's statement that they are not in merger talks with HOT," according to Meliker.
During the past 52 weeks, $13.4 billion cap Starwood has traded in a range of $66.76–$87.20 per share.
Canaccord: A Bullish View, $93 PT
Canaccord remains bullish on the hotel sector, noting that the lodging cycle should continue to remain strong through 2017 and perhaps even beyond.
While Starwood Hotels & Resorts shares continue to trade slightly below the price level when the strategic review was announced, Meliker sees "six potential outcomes from the strategic review process, all of which point to upside from current levels, given our favorable view of the lodging cycle."
Canaccord's Starwood Scenarios
"Valuation from [Canaccord's] six scenarios results in a blended average valuation of $93 per
- "Scenario 1: company sale to a strategic buyer (30 percent likelihood, $105 value)
- "Scenario 2: company sale to private equity in an LBO (10 percent likelihood, $86 value)
- "Scenario 3: merger of equals (20 percent likelihood, $93 value)
- "Scenario 4: acceleration of asset sales, with proceeds used to repurchase stock (20 percent likelihood, $86 value)
- "Scenario 5: acceleration of asset sales, with proceeds used to buy a brand (15 percent likelihood, $85 value)
- "Scenario 6: HOT does nothing out of the review process (5 percent likelihood, $83 value)."
Canaccord On Starwood Valuation Model
Meliker's $93 target price is also derived from the Canaccord DCF model after taking into account management's reduced guidance and lowering 2015E RevPAR by 100 bps.
Canaccord now forecasts "2015E EBITDA and recurring EPS of $1,194 million and $3.01, respectively. 2016E EBITDA moves to $1,256 million, while recurring EPS per share decreases to $3.25."
This $93 base-case valuation also represents 13.8x 2016E EBITDA per share, assuming $390 million of share buybacks.
Canaccord: Potential M&A Suitors
Meliker believes that the most likely candidates would be $26.2 billion cap Hilton Worldwide Holdings Inc (NYSE: HLT) and $9.8 billion cap Wyndham Worldwide Corporation (NYSE: WYN), along with InterContinental Hotels Group.
Notably, both Hilton and InterContinental Hotels Group trade at premium multiples to Starwood, which implies that a potential deal could be accretive to earnings without synergies.
However, potential synergies could be significant, according to M&A consultants contacted by Canaccord, "anywhere from 50–80 percent of HOT's G&A could go away in a strategic buy-out, but the level would be based on how much overlap there is."
This is a major factor in the $105 potential Starwood Hotels & Resorts share price estimate, which assumes a strategic buyer achieving a 75 percent reduction of about ~$400 million of G&A expense and a 13x EBITDA valuation multiple.
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Latest Ratings for HOT
|Jul 2016||Canaccord Genuity||Terminates||Hold|
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