Gravy Train Coming for Orient-Express
Odette Galli
09/01/04 - 08:29 AM EDT
Compared with this time last year, when travel was still being affected by the SARS epidemic and the war with Iraq, business is booming. However, shares of travel-related stocks have stumbled. In the last month, while the
S&P 500 is up nearly 1%, the Dow Jones Lodging Index is down about 3%.
Perhaps this is because many of these stocks had such a big run-up leading to the summer months, so the expectations of better results were already factored into the shares. Indeed, the lodging index is up close to 10% year to date, still better than the flattish return on the market overall.
This does not explain, however, why shares of
Orient-Express Hotels (OEH Quote) -- the owner and operator of ultra-high-end and unique hotel properties around the world -- have not only lagged the market in the past month, down slightly more than 3%, but have also underperformed year to date, falling 6%.
Orient-Express' underperformance comes even though the firm not only reported better-than-expected second-quarter results -- earnings of 38 cents, up nearly 23% from last year and a penny better than the consensus estimate -- but also sounded very bullish about upcoming third-quarter results.
Trading at a price-to-earnings ratio of just 15 times the consensus estimate of $1 per share for 2005 and an enterprise value to 2004 estimated EBITDA ratio of just 12, Orient-Express is one of the cheapest lodging stocks around. Indeed, comparable ratios for the other lodging sector stocks average over 20 P/E and 17 EV/EBITDA, respectively.
One problem could be Orient-Express' capitalization and ownership structure. The company's equity market value of just over $500 million means it's probably not the first place large-cap portfolio managers turn for exposure to the travel-related sector. Making matters worse -- from a liquidity standpoint -- is that
Sea Containers(SCRA Quote), Orient-Express' former parent, still owns 14 million OEH shares, or 42% of the stock outstanding. It has been Sea Containers' intention all along to sell its remaining holdings.
Sea Containers Chairman James Sherwood is also chairman of Orient-Express, while his son Simon Sherwood is OEH's CEO. However, the elder Sherwood has been adamant that management would not consider selling its stake with the stock at its current level.
Indeed, speaking on the company's last conference call earlier this month, Sherwood noted what he perceived to be the unusually large disparity between OEH's current stock price and its underlying fundamentals, in addition to the valuations being accorded other lodging stocks. He added that Sea Containers would probably not sell at a price below the $25 to $30 range. Even so, the overhang of the Sea Containers ownership -- and the possibility that it could one day flood the market with its holdings, which would put downward pressure on OEH stock -- may mean the stock has trouble getting the full valuation it ultimately deserves.
Nevertheless, on the basis of the latest quarterly results, combined with the company's bullish outlook for the next quarter, it stands to reason that OEH's valuation could certainly be higher than where it is today. Orient-Express reported same-store REVPAR (revenue per available room -- industry parlance which takes into account both occupancy and room rates) growth of 18%, which on a local currency basis was up 10%.
Although the higher euro has caused business in Europe to be more sluggish than the company had hoped for by this time (typically 30% of European bookings are from U.S. leisure travelers), growth in the rest of the world more than made up for it. North American REVPAR jumped 16%, with a 12% gain at the company's important Windsor Court Hotel in New Orleans. In the rest of the world, REVPAR soared 38%, with particular strength in Bora Bora and South America.
Equally encouraging was the big improvement on the profit margin line. Orient-Express' EBITDA margin jumped 170 basis points to 26.1%, from 24.4% in the same quarter last year, putting the company back on track toward its goal of restoring margins to their pre-2000 level of 30%. "As the revenue flows through, margins will recover," Simon Sherwood said on the call.
More good news is likely to come out of the third quarter. The current consensus estimate is for earnings of 34 cents per share, up 26% from 27 cents last year, which appears very achievable given current booking trends. At the end of the second quarter, third-quarter bookings companywide were up 14%, with Europe relatively flat, North America up 12% and the rest of the world up 30%. For the fourth quarter, bookings are also up 14%.
Orient-Express continues to be diligent on the acquisition front, where it has been very savvy, paying no more than 10 times EBITDA for the properties it has purchased. And with $138 million in available cash on the balance sheet, the company has the liquidity to remain active. James Sherwood indicated that the company may be in the position to announce a deal by the third-quarter conference call.
While many travel stocks have made a big recovery this year, Orient-Express shares have been left behind. With the likelihood of more strong results in upcoming quarters, it's unlikely that this disparity will last much longer.
