We are upgrading our recommendation on Starwood Hotels & Resorts Worldwide Inc. (HOT) to Outperform.
Starwood has reported a fourth quarter loss of $186 million or $1.03 per share from continuing operations. However, excluding special items, the company has earned $95 million or 51 cents per share in the reported quarter. Adjusted earnings were well ahead of the Zacks Consensus Estimate of 22 cents per share, primarily driven by better-than-expected revenue.
Revenue fell 1.2% from the prior-year period to $1.28 billion. Though the company continued to experience a decrease in revenue per available room (RevPAR), the rate of deterioration has moderated. In fact, in the recent months, the industry is showing signs of RevPAR improvement.
Going forward, Starwood’s strong pipeline, significant international exposure, solid balance sheet, shift to a fee-based business model and a less capital-intensive timeshare business augur well.
The company is poised to benefit from the increase in demand for hotels. It has over half of its hotel properties outside the U.S., an international exposure that not many of its peers can boast.
Additionally, Starwood has over 80% of its 85,000 room pipeline to be built in international markets. The demand for hotels in the international market is greater than in the U.S., and the pace of recovery is particularly fast in the Asia-Pacific region. Of its total pipeline, nearly 60% is in the Asia-Pacific markets.
However, considering the sluggish recovery of the economy and the slow booking pace, we expect the top line improvement to be slow. Though the industry is of late experiencing an increase in demand, overall pricing continues to be weak. Pricing pressure persists and is expected to continue as hotels continue to offer heavily discounted rates to draw in travelers.
However, with weak pricing and an increase in hotel occupancy, operating expenses are expected to increase. For every room that is filled, there are additional costs such as housekeeping, laundry and utilities that must be borne. This would pressurize margin improvement in the near term.
Nevertheless, we think that the positives have outweighed the negative factors, and therefore we have an Outperform recommendation on the shares of Starwood.
Reflecting positive sentiments about the company, the shares of Starwood increased $1.18 or 2.55% to $47.38 in Tuesday’s regular session on the New York Stock Exchange.
Read the full analyst report on “HOT”
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