Starwood Outshines Industry Rivals
How hot can
Starwood
(HOT)
get?
On Wednesday, UBS upgraded the hotelier to neutral from reduce, becoming the fourth Wall Street brokerage to increase its rating on the company since Starwood released earnings and raised guidance six days ago. But with Starwood shares up nearly 10% since that earnings release, valuation is rapidly becoming a concern and shares were virtually unchanged on the news, gaining 3 cents, or 0.1%, to $38.27.
, None of the hotel operators which released fourth-quarter earnings over the last two weeks have been as bullish as Starwood, which topped analyst earnings per share targets by 10 cents and raised 2004 EPS guidance to $1.10, well above Wall Street's consensus at the time. At the core of Starwood's optimism is the return of the lucrative business traveler to upscale properties like the W hotels chain and mass market Sheraton brand.
Wall Street analysts rushed to upgrade the company's stock and boost EPS estimates. On the day of its earnings release, Fulcrum Global Partners boosted its rating to buy. The following day, Harris Nesbitt Burns raised its opinion to outperform while Morgan Stanley moved its rating to underweight. Eighteen of the 21 analysts who cover Starwood raised their 2004 EPS estimates by an average of 15 cents. All told, nine analysts now rate Starwood a buy, with 11 at hold and just one at sell.
While rivals have been making some noise about seeing the beginnings of a business travel recovery, none have been able to surpass Wall Street's optimistic estimates. Along with their earnings releases,
Hilton
(HLT) - Get Report
said it would have a "comparatively challenging first quarter" and lowered guidance below expectations while
Marriott
(MAR) - Get Report
said earnings would be relatively in line.
Is Starwood Expensive or Cheap?
The end result is that Starwood has emerged as a Wall Street darling, but a closer look shows that shares may be getting pricey when viewed on a price-to- earnings basis, especially given that Starwood is alone in seeing the strong business travel recovery.
Starwood's price to 2004 EPS estimate is just over 35, higher than both Hilton and Marriott. Using 2004 EPS estimates, the company's valuation is much higher than the 24.1 P/E multiple on the entire hotels sector and is also above its historical P/E of 26.5, according to
Bloomberg
.
But because hotel chains like Starwood own so much property that is subject to depreciation, Wall Street uses an earnings model based on price to EBITDA, or earnings before depreciation interest taxation and amortization. And on this basis, even given Starwood's recent rally, the stock trades just south of 12 times EBIDTA, but essentially in line with the sector as a whole.
"I think that Starwood is not as expensive as people think," said Will Marks, hotel analyst at JMP Securities, who upped his rating on three weeks before its earnings release having seen improving business trends. "If you take the value of assets that are not producing income into account -- and I say they've got $500 million not producing -- then Starwood is about 11 times EBIDTA. Hilton is cheaper at 10 times, but Marriott is at 12 times. I don't think it's off the charts expensive." (JMP Securities does not have any banking relationships with any of the hotels it covers.)
The Case For a Premium
In the end, Starwood may deserve a premium because its outperformance going forward is driven by company-specific issues, rather than a broader business travel recovery.
"Starwood, Marriott and Hilton should all benefit from improved business travel, no question about that," said Marks. "But Starwood seems to be benefiting more and some of that has to do with their ability to enhance certain brands that were not performing well. Give them some credit with what they've done with the Westin and Sheraton brands."
As a note from J.P. Morgan pointed out in reaction to the upside earnings surprise, Starwood's hotels are in urban centers where business travelers are showing up. According to the broker's research, revenue per available room from Starwood's New York properties, which account for nearly 14% of EBITDA, is expected to rise 8% in 2004.
While Starwood appears to have more leverage in the business travel recovery than rivals, because of the revival of brands and its urban-centered hotels, investors are at a crossroads. Not only must they figure out how to properly value the company, they must determine how much of a premium Starwood deserves for its potential -- if at all.