Hotel Business Creeping Back to Health - TheStreet

Hotel Business Creeping Back to Health

Starwood and MGM Mirage post solid fourth-quarter results.
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Sin is on its way back, apparently.

Hotel chains

Starwood Hotels

(HOT)

and

MGM Mirage

(MGG)

Thursday posted stronger-than-expected fourth-quarter earnings, suggesting the struggling travel business continues to mend.

The healing trend is playing out most notably in the nation's sin capital, where MGM's operations are focused. "It now seems clear that no city in the United States has rebounded as quickly and profoundly as Las Vegas," said Jim Murren, MGM's CFO and president, in a statement.

On Thursday, Starwood rose $1.67, or 5.1%, to $34.25, while MGM rose $1.04, or 3.3%, to $32.56.

Results at both companies were sharply lower than a year ago, showing how deeply the industry was damaged by the Sept. 11 terrorist attacks. But the two companies also produced upside surprises on earnings and revenue and made generally sanguine pronouncements about future trends.

Starwood, owner of the Sheraton, Westin and W hotel chains, reported a loss of a penny per diluted share in the fourth quarter, down from 64 cents a share a year ago. Revenue dropped 21% from a year ago, to $878 million. Fourth-quarter revpar, or revenue per available room, an industry benchmark that factors in rates and occupancy, dropped 24% in North America and 26% internationally.

Still, those numbers easily beat estimates, and the company made mostly bullish forecasts for 2002. Starwood now expects to earn $1.30 a share for 2002, well above the $1.08 analyst consensus. While first-quarter earnings of 5 cents a share will be a penny under analyst expectations, the remaining three quarters are expected to pick up the slack as an anticipated second-half economic recovery unfolds.

"Long term, this is a name you want to own for the recovery," says Jake Fuller, an analyst with Thomas Weisel Partners who rates the stock attractive. But Fuller warns that Starwood's many high-end urban-centered hotels, while impressively profitable when times improve, court business travelers who could stay office-bound if the recession drags on. (Thomas Weisel Partners doesn't have a banking relationship with Starwood.)

For its part, Las Vegas-based MGM, owner of the MGM Grand, Bellagio and Mirage hotel-casinos, posted fourth-quarter earnings of 18 cents a diluted share before nonrecurring items, lower than the year-ago 43 cents but double the Wall Street estimate. Revenue took a hit, dropping 13% to $896.3 million and falling short of the $916 million estimate.

Unlike Starwood, MGM isn't tied to the business traveler. About three-quarters of the company's revenue comes from Las Vegas. Reflecting doubts about the gaming business in a weakening economy, credit-rating agency Moody's this month cut Mirage's long-term debt to a junk, or noninvestment grade, rating.

But "we still feel comfortable with their balance sheet," says Credit Suisse First Boston analyst Brian Egger, who has a buy rating on both MGM and Starwood. MGM itself offered no specific financial guidance Thursday, saying only, "Current trends in our resorts indicate that casino and noncasino business should continue to improve throughout 2002." (CSFB has no current banking relationships with either company.)

A trend playing out in both companies' favor is that industry growth should dip below 1% in 2002, far below its 30-year average of 2.8%, says Rod Petrik, an analyst at Legg Mason, who recently upgraded Starwood to strong buy. "Over the last 30 years, every time you have the radical deceleration of supply growth, it's followed by revpar growth," Petrik says. Of Starwood, he adds, "I think it's easily a $40 stock." (Legg Mason doesn't have a banking relationship with Starwood.)

Although the Super Bowl, Chinese New Year and the NCAA basketball tournament should be near-term catalysts for Las Vegas business, Egger expects the travel recovery to be a gradual one. "Things are getting better," he says.