We believe the two main takeaways from Marriott’s (MAR) second quarter were that its brand advantage (source of its narrow moat) continues to strengthen, while the U.S. corporate industry is showing some recent slowing. We plan to lift our $94 fair value estimate $2-$3 mostly to account for the time value of money, but also for a lower tax rate and slightly higher asset-light fees in 2017, mitigated by lower revPAR the rest of the year. We see shares as slightly overvalued and believe investors should wait for a larger margin of safety, especially given our view that we are in the later stages of this hotel cycle.
We find little reason to alter our long-held view that Marriott’s brand advantage will continue to expand in the next several years, as its second-quarter room pipeline grew to 440,000, up from 420,000, representing a solid 36% of its 1.2 million existing room base. Further, the company’s pipeline constitutes one third and one fourth of U.S. and international industry rooms under construction, respectively, while above its roughly 15% and 4% existing domestic and foreign share, respectively. Therefore, we plan to maintain our roughly 6% average annual unit growth over the next five years, well above average historical industry supply rates of 2%.
Marriott’s North American (65% of total rooms) revPAR growth slowed in the second quarter to 0.9% from 3.1% seen last quarter, due to calendar shifts (Easter and July 4). Additionally, management essentially lowered revPAR for the rest of 2017 in the region to 1%-2% from 1%-3% prior, on what we believe is some pause of U.S. corporate spend due to political policy uncertainty, which was highlighted on narrow-moat Hilton’s earnings call last week. As a result, we plan to reduce our systemwide revPAR growth estimate toward 2% from 2.8%, which compares with Marriott’s unchanged global revPAR forecast of 1%-3% for 2017.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.