On October 28, Starwood Hotels & Resorts Worldwide Inc. (HOT) reported its third quarter fiscal 2010 earnings of 25 cents per share, ahead of the Zacks Consensus Estimate of 22 cents and the year-earlier quarter’s earnings of 14 cents per share. Given below is our report on the recent earnings announcement as well as subsequent analyst estimate revisions over short and long-term periods.
Earnings Report Flashback
Revenues jumped 8.6% year over year to $1,255 million in the quarter, but fell short of the Zacks Consensus Estimate of $1,262 million.
(Read our full coverage on this earnings report: Starwood Beats on EPS, Not Sales
Earnings Estimate Revisions — Overview
Following the release of Starwood’s third quarter results, estimate revision trends among the analysts depict a neutral near-term outlook and a strong positive outlook. Let’s dig into the earnings estimate details.
Agreement of Estimate Revisions
Over the last 7 days, a mixed trend has been noticed for the fourth quarter, with earnings estimates being increased by 7 out of 21 analysts. On the other hand, downward revisions in estimates were made by six analysts.
The analysts expect growth to be restricted in the near term. With a high rate of unemployment and mounting pressure from public and private debt, demand growth is expected to be limited in the near term. Metrics are improving at a slower rate.
However, the analysts remained optimistic on fiscal 2010 and 2011 earnings as 9 out of 22 analysts raised their estimates while two lowered the same. For 2011, 13 analysts raised their estimates while 3 moved in the opposite direction. The analysts remained impressed with Starwood’s position as a leading lodging brand.
The analysts, by and large, are mainly impressed with management’s expectation of increased earnings for 2010, stringent cost-control initiatives and the company’s growing presence in emerging economies, especially China. This group of firms believes that with slow economic recovery and rising price of hotel properties, the company will outperform the industry in the long term.
The trend was almost similar over the last 30 days with no directional outlook observed for the fourth quarter of fiscal 2010, but a positive bias was noticed for 2010, 2011 and the first quarter of 2011.
Magnitude of Estimate Revisions
The magnitude of estimate revisions for Starwood has been on an upturn over the last 7 days. Following the release of third quarter results, estimate for the fourth quarter was upped by a penny. The estimates for both fiscal 2010 and 2011 were raised by 3 cents.
Currently, the Zacks Consensus Estimate for the fourth quarter is 38 cents per share. For 2010 and 2011, the Zacks Consensus Estimates are $1.10 and $1.54 per share.
Our Recommendation
In the third quarter, we believe the company benefited primarily from a recovery in demand leading to higher revenue per available room rate as well as occupancy. Going forward, the company’s strong pipeline, and significant international exposure especially in emerging markets like China augur well for its earnings.
China promises immense growth prospects in the near future with demand continuing to outpace supply. We believe Starwood will enjoy a first-mover advantage in China and will capitalize the potential in full.
However, we believe Starwood is not yet totally immune to challenges stemming from an economic slowdown. Although demand has revived the booking window and remained longer in the third quarter than it was earlier in the year, it is still shorter than the normal level.
Moreover, with around 40% international exposure, Starwood’s revenue is highly sensitive to currency fluctuation. Increased unemployment rate in the developed market is also likely to affect business trips, which Starwood highly relies on.
Starwood currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
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