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Starwood Hotels: How to Play It

BOSTON ( TheStreet) -- Starwood Hotels (HOT - Get Report) has soared 75% in the past 12 months, outperforming the S&P 500 by 68 percentage points. The stock's beta value (a measure of stock market correlation) of two explains just a portion of the meteoric run.

The rest is due to operational improvement. Still, Starwood has delivered annualized losses of 6.1% since 2007. Is Starwood still an attractive hotel stock or are competitors' shares better picks?

Starwood's second-quarter net income decreased 15% to $114 million, but earnings per share tumbled 46% to 42 cents. Revenue grew 10% to $1.3 billion. The gross margin widened from 22% to 23% and the operating margin extended from 8.9% to 11%.

Starwood held $154 million of cash and $3.4 billion of debt at the end of the quarter, equal to a weak quick ratio of 0.4 and an excessive debt-to-equity ratio of 1.7. Quarterly return on equity, a key measure of profitability for investors, turned negative, and return on assets contracted from 3.6% to 0.8%.

Those returns lagged the mean for the industry and S&P 500. Starwood's stock has gained 14% since the quarterly report. It trades at a forward earnings multiple of 35 and a cash flow multiple of 22 -- 44% and 67% discounts to hotel, resort and cruise line peer averages. Yet its book value multiple of 5 and sales multiple of 2 reflect discounts of 14% and 25%. The stock offers a distribution yield of 0.4%. Analysts are bullish, with 14, or 64%, rating Starwood "buy" and eight rating it "hold." None rank the stock a "sell."

A median price target of $56.57 suggests a 13% return. Bullish are Stifel Financial, expecting the stock to rise 40% to $70, and Citigroup, predicting a gain of 30% to $65. In the bear camp are Deutsche Bank, expecting Starwood to fall 16% to $42, and Societe Generale, forecasting a 20% drop to $40. Institutional owners paint a muddled picture. Of the 20 largest, nine, including largest investor Waddell & Reed (WDR), added to their positions in the latest quarter as nine, including second-largest owner Fidelity, trimmed their holdings. Two investors held steady.
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