Hotel Investors Pack Up

A slowing economy could also hurt hotel development a few years out. Marriott gets nearly all of its hotel-related revenue from managing hotels, rather than owning them. A good piece of the company's profit future growth is predicated on the development of additional hotels worldwide.

For the third quarter, Marriott posted an adjusted profit of $122 million, or 31 cents a share, down from $144 million, or 34 cents a share, a year earlier. The results matched the high end of the company's guidance.

Marriott blamed the year-over-year decline on a higher tax rate and declining timeshare profits.

Owners vs. Operators

So how do you play the hotel sector?

There is a case to be made for owning the major hotel operators, Marriott and Starwood(HOT Quote), owner of brands like Sheraton and Westin. Both companies have strong balance sheets and large amounts of free cash flow, which allow for easy funding of share buybacks.

Also in the companies' favor, about 50% of their overall profits will come from overseas within the next few years.

Both companies, though, are facing headwinds in their timeshare businesses, which represent about 20% of their total revenue. The timeshare business is at some level tied to residential real estate sales, so could be further damaged by the ongoing housing slowdown.