The glow around
may be dimming.
So far this year, Starwood has driven the hotel industry's recovery, talking up business prospects while issuing better-than-expected earnings guidance. But with Starwood's shares up more than 50% in the last year, Thomas Weisel analyst Jake Fuller Wednesday downgraded the industry leader to peer-perform from outperform, saying investors should consider other hotel stocks.
In Fuller's view, Starwood's earnings estimates have come up so much, so quickly that the company has less upside potential than rivals. Since the beginning of 2004, Fuller notes that Wall Street's 2005 earnings per share expectations for Starwood have jumped 35% vs. 8% for the whole group.
"Estimate revisions for the rest of the group have been fairly modest and could improve as the gap with Starwood narrows, pointing to greater potential upside in out-year estimates," said Fuller, in his research report. "For those still seeking lodging exposure, it may be time to start looking at those more leveraged to the later stages of the cycle."
Starwood shares were up 7 cents, or 0.2%, to $42.07. While investor reaction was muted, the downgrade is notable because it bucks Wall Street's recent trend of bullishness towards Starwood and opens up a debate over where the hotel industry is in the recovery cycle.
At the moment, Wall Street believes the recovery is still nascent. In the last month, four brokerages -- Goldman Sachs, Argus Research, UBS and Merrill Lynch, have upgraded Starwood, citing the company's extremely strong revenue per available room, or Revpar, growth. Currently, a total of 13 analysts rate Starwood a buy, with only five rating it a hold. None consider it a sell.
But with the
expected to shift to a rate-increase mode and Starwood facing tough second-half comparisons, Fuller said that the company's growth was likely to peak in the second quarter and decelerate thereafter.
According to Fuller's estimates, Starwood's second-quarter revpar growth will be 12% vs. a gain of 8% for
. But in the back half, Fuller expects Marriott's Revpar to grow 7% vs. 6% growth at Starwood.
"Starwood was a good early-cycle play with exposure in the right markets, but superior growth is now in the numbers and comparison trends are shifting towards competitors," Fuller said.