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Marriott: A great place to stay, but is it a great place to invest?


Tuesday, April 26th, 2016

Marriott International Inc. recently acquired the Starwood Hotels and Resorts Worldwide chain. Marriot was in a battle with a Chinese company, but they won the war and now officially own Starwood Hotels.

With this latest acquisition, Marriott is now the world's leading lodging company, with 5700 hotels and 1.1 million rooms. These are pretty impressive numbers. As a Gold Member of the Marriott Rewards Program, I am excited about the many choices I have worldwide to use and obtain reward points.

This brings me to the lesson people say and even quote Warren Buffet as saying, “Buy what you know.” However, some investors don't fully understand the meaning when he says “buy what you know,” it doesn't simply mean you are a guest at the hotel or recognize the name. It means you understand the business, inside and out, and have a very good comprehension of the financial statements and the overall financial strength and earning potential of the company.

As an investment, Marriott is asset light because they don't own a lot of the real estate. They collect fees from what I call business partners who own the property and pay Marriott fees for running the hotel.

That is a pretty good business model and is helpful during economic downturns. With that said, let's take a look at some of the other numbers that are important when buying a business.

Marriott international Inc. trades under the symbol MAR and has a current market cap of nearly $17 billion. The stock has a 52-week low of $56.43 and 52-week high of $84.33 and the stock currently trades around $66 per share.

Looking at the valuation ratios, Marriott’s current price-earnings ratio (also known as the PE) is currently 21.1, roughly the same as the industry average at 20.9. Price-to-sales look very good at 1.2, well below the industry at 1.9.

I was disappointed to discover Marriott’s price-to-book value, which would include intangible assets, appears as NM. So I turned to the balance sheet to see the reason for this and did not like what I saw. I discovered the company has total assets of $6.1 billion, yet total assets were $9.7 billion, which includes debt of $4.1 billion.

If you do the math, you will see Marriott has negative equity of $3.6 billion. For those that don't understand equity, it’s like having a negative net worth for yourself; not a great position to be in. 

Moving on, sales year-over-year over the last 12 months were up 5%, which is better than the industry which climbed 2.7%. Marriott has also done a fair job growing their earnings per-share year-over-year for the last 12 months, which are up 24.8%. This is a very good number, even though the industry was up 32.7%.

Looking at the balance sheet, I already pointed out they have negative equity so there is no debt-to-equity comparison. But on top of that, the current ratio is extremely low, at 0.43. The entire industry of the hotels and motels has a current ratio of only .53, but this does not give me peace of mind because it tells me Marriott only has about five months of current assets to pay off the next 12 months of current liabilities.

And of those current liabilities, 80% come from their accounts receivable. Marriott pays a 1.5% dividend and uses $253 million to pay it. With a current cash on hand of $96 million, they count on their strong cash flow of $1.4 billion per-year to pay that dividend. That doesn't leave much of a cushion if things don't go well financially down the road.

The net profit margin for Marriott comes in at 5.9%, well below the industry average at 9.0%. There is no return-on-equity for Marriott, since they have no equity. Unfortunately that is an important ratio to see what type of return a company gets from their equity.

The efficiency of receivable turnover for the last 12 months is at 13.2, and in line with the industry at 13.3. If the receivables were to slow down, this could hurt the company's cash flow. The low cash position and the high debt put the company in a position of financial strain. 

Looking forward to the year ending December 2017, Marriott is expected to earn $4.41 on a strict GAAP accounting basis. Based on the mean of 16 analysts, this would yield to a forward PE of 15 times earnings. Using a multiple of 16.5, this would give a target sell price of only $73/share, which is only about a 10% gain.

As a consumer, I love Marriott and will continue to stay at their hotels and enjoy their services. As an investor, I will have to invest my money elsewhere where I can find a company on sale. Marriott appears to be fully valued and on the higher risk side at this time. 

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