Some Like it HOT

06/24/2005 12:00 am EST

Focus:

Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Vahan Janjigian uses quantitative analysis to isolate 50 top-ranked stocks. From these, the ten with the highest rank and highest beta (a measure of volatility risk) comprise his aggressive model portfolio. Here, he looks at Starwood Resorts, a "HOT" portfolio addition.

"Starwood Hotels & Resorts (HOT NYSE) operates upscale, full-service lodging facilities. Its well-recognized brands include Sheraton, Westin, Four Points, W, Luxury Collection, and St. Regis. HOT operates 733 properties and nearly a quarter million rooms in over 80 countries. The company targets different segments of the upscale market. Sheraton, the largest brand with nearly 400 locations, and Westin appeal to a wide range of business and leisure travelers. St. Regis and Luxury Collection specialize in personalized service and offer more amenities. W hotels offer modern, sophisticated designs and custom-made furnishings. The company’s only moderately priced brand, Four Points, targets frequent business travelers.

"HOT owns only 138 of the 733 properties it operates. The rest are licensed under franchise agreements or are independently owned businesses managed by HOT. Management contracts are typically long-term agreements calling for Starwood to run the day-to-day operations, which include staffing, training, supervising, maintenance, repair, and budgeting. Management fees are typically based on gross revenues with additional performance fees based on income. Franchised facilities are managed independently. For the right to use its brands, Starwood derives fees based on a fixed percentage of room revenue.

"The company derives additional revenues for providing a centralized reservation system, public relations, and marketing and media advertising services that benefit managed and franchised properties. Starwood operates a smaller, faster growing business that consists of selling timeshares known as vacation ownership interests (VOI). VOIs are offered through 19 company-owned resorts housing 5,000 rooms. Vacation rights are tradable and typically range between a week and a month. The company also provides VOI financing.

"The travel and leisure industry faced difficult challenges in recent years precipitated by the outbreak of SARS in Asia and the war in Iraq. Fortunately, HOT enjoyed a healthy rebound in 2004 thanks to improving economic conditions and the weakening dollar, which made travel to the US more attractive. Revenues rose 15.9% year-over-year to $5.37 billion. Revenues per available room, a key industry metric, increased 13% for same-store company-owned hotels. Pro forma net income more than tripled to $1.72 per share. The current year started off in similar fashion as net revenues for the first quarter climbed 14%. Despite renovations to three key properties and an earlier than usual Easter, net income jumped 139.4% for the quarter.

"HOT recently announced its intention to acquire Le Meridian’s brands and related management and franchise businesses. The deal is subject to approval, but it would likely dilute earnings in the current year due to transition costs associated with integrating the businesses. Yet we believe prospects are bright. Major renovations should improve revenues and margins, and international growth is being fueled by the fast expanding market in China. We have added HOT to our recommended list as a holding in our aggressive model portfolio."

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