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Starwood Hotels & Resorts


shares rallied almost 7% Thursday after the company posted a blowout quarter, raised guidance and said business travel is improving, boosting the entire lodging sector.

Starwood said fourth-quarter net earnings totaled $87 million, or 42 cents a share, down 6.6% from $91 million, or 45 cents a share, a year earlier. But excluding items, which is how Wall Street views the company, Starwood earned 42 cents a share, much higher than the 32 cents a share expected by analysts and nearly twice as much as the 24 cents a share it had in the year-ago quarter.

Revenue rose 3.1% to $1.2 billion, while revenue per available room -- or revpar, a key metric for the hotel industry -- increased 6.6% worldwide and 4.7% in the U.S., indicating that business travel is picking up.

"The positive trends we saw emerge in September continued through the fourth quarter as the weakness in group business was more than offset by continued strength in business transient, powered by significant market share gains in nearly every brand in our system," said Barry Sternlicht, company chairman and CEO. "Indeed, without the major unanticipated increases in workers compensation, our performance and margin growth in the fourth quarter would have been much better."

Shares of Starwood rocketed higher, gaining $2.25 to $37.15, helping touch off a sector-wide rally, spurred by hopes that business travelers will fatten industry profit margins and fuel a strong recovery. The Dow Jones Hotel Index was up 4% by midday, with


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up 3.3% and

Hilton Hotels

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up 2.5%.

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In addition to the strong quarter, Starwood boosted guidance for the first quarter. Assuming revpar increases between 5% and 6% in same-store hotels in North America, Starwood said net income would be $16 million, or 8 cents a share, surpassing current Wall Street expectations of flat earnings.

"It is indeed remarkable that given the long war and SARS impact on our global enterprise revenue for the year was actually up (excluding asset sales)," Sternlicht said. The company's strategic investments "allow us to increase 2004 expectations for earnings and cash flow significantly. Our global pipeline has perhaps never been deeper or of higher quality."

But analysts were torn on whether Starwood's news was company specific or the signs of a wider industry turnaround. While Starwood knocked out a big fourth quarter and raised guidance, many rivals did not.

A week ago, Hilton Hotels said it would have a "comparatively challenging first quarter" and said 2004 earnings would come in at 45 cents a share, two cents shy of expectations, with revpar between 3% and 4%.

Extended Stay America


made similar comments, guiding earnings expectations lower.

"Given that all the other hotel companies that have reported so far have actually guided 2004 below Street expectations, we would not take Starwood's results to be an indicator of a dramatic industry turn," said Joyce Minor, analyst at Lehman Brothers.

But others say other hotel chains could be overly conservative in their expectations, unwilling to count on the economic recovery to drive revpar gains.

"Considering how much business travel has appeared to be bouncing back and how strong leisure continues to be, it is surprising that Hilton is not willing to step up and be more aggressive," said Stephen Kent, analyst at Goldman Sachs, in a note on Hilton's quarterly results.

While the state of the business travel recovery remains unclear, the underlying trend has been positive. Starwood is seeing improvement and a recent survey from the National Business Travel Association said that travel would rebound later in the year.

Nearly 75% of the business travel managers surveyed by the NBTA said that travel would rebound from current levels. More than half of the 220 managers polled said they had boosted their travel budgets and said the recovery will come in 2004, confirming Starwood's guidance.

Marriott's earnings release next week should provide investors with another take on what 2004 might hold for hotels. Ultimately, the strength of the economic recovery will the be the determining factor in whether business travelers return to hotel lobbies, but Starwood's strong fourth quarter and rosy outlook just upped the ante for the entire industry.

"This is exactly the 'raising of the earnings bar' that this group has been looking for," said Deutsche Bank lodging analyst Marc Falcone.