Orient-Express: Luxury in the Bargain Bin

The stock of this high-end hotel owner looks like a value at these levels.
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The last month has been a disturbing one. From a bomb blast in Bali that killed hundreds, to the hostage crisis in Moscow, not to mention the ongoing talk of war with Iraq, it's hard to imagine that the environment could get much scarier for people wishing to travel.

In spite of it all, travel-related stocks have actually fared relatively well over the last month. Granted, many of these companies had sold off dramatically earlier in the year. Even so, in the last month, the airline and lodging sectors have made recoveries of 13% and 4%, respectively, exceeding the 3% rise in the

Dow Jones Industrial Average

over the same period.

My picks in the lodging sector have turned in a mixed performance recently. The shares of

Starwood Hotels

(HOT)

have rebounded 10.5% since I last

highlighted the stock in late September, and I still think it represents good value for investors with longer-term time horizons.

Orient-Express Hotels

(OEH)

, however, has done little over the last month, despite the fact that its business is recovering nicely. Along with its lodging peers, Orient-Express lowered guidance on its third-quarter conference call last week and now sees full-year earnings below the 97 cents a share the company earned in 2001.

Travel Angst?
Orient-Express shapes up as a bargain

But given the exceptional quality, location and profitability of its hotel properties, Orient-Express shares are very attractively valued here, making it a more appealing choice in this uncertain environment.

Strong Operations

Orient-Express' third-quarter results reinforced some of the company's better qualities -- particularly its ability to raise prices in this very tough, competitive environment. The company's revenue per available room, or RevPAR (the best measure of sales as it takes into consideration room rates, as well as occupancy) rose 5% in the quarter, reflecting a surprisingly strong 9% increase in rates and a 4% decline in occupancy.

Orient-Express gets two-thirds of its sales from the upscale leisure traveler, helping to insulate it from the more economically sensitive and competitive business travel market. Most of its upscale lodging peers are just the opposite.

Not only that, most of the company's properties are so unique or are in locations with high barriers to entry (like the Hotel Cipriani in Venice) that competition is scarce. On the quarterly conference call, CEO Simon Sherwood told listeners that "we are pushing for rates and are not in price wars with the competition."

One of the main highlights of the quarter was the company's performance in North America, which represents about 22% of its cash flow. RevPAR rose 8%, one-half of which was from higher rates and the other 4% from higher occupancy.

Windsor Court, the company's biggest property, located in New Orleans, had a 5% increase in RevPAR, with a 2% increase in rates and a 3% rise in rooms sold. These numbers easily exceed the less than 2% increase in RevPAR for the entire North American upper-upscale segment.

Sherwood said first-quarter bookings for North America (although typically representing just 20% of the business) are up 11%, and up 12% for Windsor Court.

Acquisitive Nature

Even more important, acquisitions continue to be a driving force in Orient-Express' current and future growth. In the third quarter, for example, acquisitions contributed $2.5 million to earnings before interest, taxes, depreciation and amortization in the quarter -- mostly in Europe. In fact, if it weren't for the acquisitions in the last year, like La Residencia in Spain and Le Manoir Auz Quat' Saisons in Oxfordshire, England, the company's EBITDA in Europe would have been flat.

Orient-Express continues to look at exceptionally well-positioned properties to acquire at attractive prices, and the company hopes to conclude several others by early next year in time for the peak traveling season. Sherwood even said some properties that had turned them down earlier in the year "are now coming back at lower multiples." Orient-Express says it continues to aim to pay no more than 10 times the 12 months trailing EBITDA for its acquisitions.

Expansions and renovations also set the stage for stronger growth in future periods. This year alone the company is spending about $40 million on capital projects (excluding about $15 million for maintenance). Some of the biggest ones include doubling the size of the Inn at Perry Cabin in Maryland, eight new rooms at the Villa San Michele in Florence, and a total refurbishing of the Bora Bora Lagoon Resort.

The company is also working on expanding the meeting and conference facilities at Windsor Court at a cost of $12 million, which should come on stream in 2004.

Stock on the Market

Besides the uncertainty in the lodging environment overall, the biggest risk to Orient-Express' shares continues to be

Sea Containers'

(SCR.A)

ownership of 17 million shares, or 65% of the company's stock. Sea Containers previously indicated that it was planning to sell 5 million shares in the open market and spinning off the remainder to Sea Containers shareholders.

Last Thursday, Sea Containers said it would sell just 2.75 million Class A common shares of Orient-Express at $12.75 each, reducing its equity interest in Orient-Express Hotels to less than 50%. For now, Sea Containers took plans to spin off the remaining shares off the table, but they could come to market at some point.

Nevertheless, the shares are a good value. Based on analysts' earnings estimates of $1.08 a share for next year, Orient-Express is trading at a price-to-earnings ratio of just 12.3 and a price-to-EBITDA ratio of 10. That's very attractive considering that Starwood reportedly sold some of its luxury European CIGA hotels for 12 times estimated forward EBITDA.

Odette Galli writes regularly for RealMoney.com. In keeping with TSC's editorial policy, she doesn't own or short individual stocks, although she owns stock in TheStreet.com. She also doesn't invest in hedge funds or other private investment partnerships. She invites you to send your feedback to

Odette Galli.