We reaffirm our Neutral recommendation on Marriott International Inc. (MAR) following an appraisal of its first quarter 2013 results. Though strong first quarter results and an improving business outlook especially in North America are encouraging, sluggish growth in China and Europe and tough comparisons keep us on the sidelines.
Why the Reiteration?
Marriot’s first-quarter 2013 earnings and revenues were ahead of the Zacks Consensus Estimate and the year-ago results. Earnings were driven by strong top-line growth, margin expansion, effective pricing strategy and share buyback activities.
Marriott’s growing North American business and solid development pipeline helped drive revenues during the quarter. Additionally, Marriott has also gained from rise in fee revenues at Marriott’s owned, licensed and franchised properties.
Marriott expects a favorable year ahead due to consistently strong demand and pricing in its business especially in North America. A low supply growth environment will likely help the company to raise prices. Moreover, the company is making efforts to further increase room rates by reducing discounts and improving the mix.
Moreover, its foray into the economy segment is another high point in Marriott’s growth story. In Mar 2013, Marriott announced its decision to introduce a Europe-based three-star economy brand – Moxy Hotels for budget travelers.
The decision marks the hotelier’s entry into the economy segment, which is somewhat untapped. The new brand will boost Marriott’s company-wide growth, which is likely to touch 80,000 rooms by 2015.
However, despite these enthusiastic facts, some concerns prevent us from being too optimistic on the stock. The weak economic conditions in Europe and slowdown in China continue to be headwinds. Revenue per available room (RevPAR) growth in Europe will remain sluggish in 2013 as a result of the weak economy and tough year-over-year comparisons following the 2012 Olympics in London, the Euro Cup Championship and a strong fair schedule in Germany last year.
Moreover, manufacturing markets such as Guangzhou and Shenzhen in China and urban markets like Mumbai in India, which are witnessing weaker demand along with strong supply, are not expected to improve significantly in 2013. Growth has also slowed down a bit in Brazil.
Marriottcurrently carries a Zacks Rank #2 (Buy). Other players in the hotel and casino industry, which look attractive at current levels, include Orient-Express Hotels Ltd. (OEH) carrying Zacks Rank #1 (Strong Buy) and Sands China Ltd. (SCHYY) and Las Vegas Sands Corp. (LVS) both carrying a Zacks Rank #2 (Buy).
More From Zacks.com