'Bricks and Mortar' Portfolio Posts Big Gains
Once its three casinos are open, Melco will be a major player in the Macau market, where growth shows no signs of slowing. The stock looks quite reasonable today at around $19; however, all Macau casino stocks could pull back soon given their tremendous runs lately.
A U.S. recession, which some economists fear is looming, would no doubt be bad news for the hotel industry. Nonetheless, Starwood's strong international brand expansion opportunities remain compelling.
If the company can achieve revenue growth of 7% per year, and margins continue to expand from pricing power, then I calculate the stock is worth around $70 using a discounted cash flow model. Taking into account share buybacks or takeover premiums could lift that price target further.
Blackstone Group's (BX) agreement to acquire rival Hilton (HLT) spurred hopes of a Starwood buyout, but the takeout premium has since left the stock because of credit-market worries. But at around $62, the stock is very attractive.
Brookfield Properties (Own)At around $26, Brookfield currently trades at 15 times next year's funds from operations per share, a proxy for commercial real estate cash flow. Analysts project the office-building owner will record FFO of $1.67 per share in 2008. Given that analysts expect 6% annual earnings growth over the next five years, the stock is reasonably priced today and likely trades at a discount to the private market value of its real estate, much of which is located in the hot New York City market. Office rents remain strong across the country. Absent a substantial national recession, Brookfield's portfolio should continue to perform well.
Penn National and Hilton Hotels (Own)Both Penn National Gaming (PENN) and Hilton have agreed to private-equity takeout deals. Hilton's deal is expected to close later this year, at which point I'll take the stock out of the mock portfolio.
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