MGM - Marriott: Nothing Spectacular

2023-09-11 16:52:42 ET

Summary

• Marriott has completed an acquisition of the Latin American hotel chain Hoteles City and is currently planning a licensing agreement with MGM.
• Revenue growth is steady at 13.9% YoY.
• The hospitality sector in general is doing well, and Marriott is faring slightly better than its main competitors.
• However, Marriott’s valuation is expensive and difficult to justify.

Overview

Marriott (MAR) is the world's largest hotel chain with over 8,500 properties around the globe, with a collective 31 brands that include Sheraton, Residence Inn, Fairfield, Ritz-Carlton, and Westin that reach all price ranges. The company reported stellar Q2 earnings , with revenue of $6.08B beating estimates of $120M (13.9% growth YoY) and non-GAAP EPS of $2.26 beating estimates by $0.09 (25.6% growth YoY). Along with small growth opportunities, Marriott has shown slight outperformance over competitors, which is attributable to their superior franchising model. However, we believe that Marriott's expensive valuation is still difficult to justify, given their lack of significant competitive edge.

New Licensing Agreements and Acquisitions

Marriott is currently planning to enter a license agreement with MGM Resorts ( MGM ) in October 2023 that will allow the chain to expand primarily in Las Vegas, where tourism has made a solid recovery since the pandemic. In addition to the locations in Las Vegas, MGM operates resorts in Atlantic City, Biloxi, Detroit, Oxen, and Springfield, which will also be a part of the new program with Marriott. In total, 17 resorts with a combined total of over 40,000 rooms will be added to the Marriott brand, increasing the company's global footprint by 2.4%.

Additionally, under the new license agreement, members of MGM Rewards, the chain's loyalty program, will be able to link accounts with Bonvoy, Marriott's loyalty program and vice versa. Booking will also be made available on the websites of both companies. It is also noteworthy that this new deal comes in the aftermath of MGM and Hyatt severed ties between their loyalty program. Although the new licensing agreement will increase revenue and have a positive impact on the company, it is our belief that the top-line benefits will remain limited.

Another point of new growth for Marriott is in its acquisition of Hoteles City for $100 million in October 2022. Hoteles City was a hotel chain in Latin America and the Caribbean that owned the brands City Express (its main brand), City Express plus, City Express Suites, City Express Junior, and City Centro. All of these brands will be given the name City Express by Marriott, forming the company's thirty-first brand. Hoteles city's properties are mostly mid-scale and include a total of 152 hotels with 17,356 rooms in 75 cities. The newly acquired company also has 5 projects under construction for a total of 676 additional rooms. Following the merger, Marriott now has 480 properties in Latin America, which makes them the largest hotel chain in that region despite being smaller than their presence elsewhere, demonstrating a potential for further expansion in Latin America. We believe that this merger demonstrates that Marriott is still willing and able to expand in new markets, signaling the company's potential for growth.

Steady Growth

Most of Marriott's hotels are franchised, meaning that their business model is asset-light with consistent revenues. For the first half of 2023, more than 76% of Marriott's revenues were attributable to franchising and management fees.

Marriott's franchising strategy has shown to be quite lucrative, with very strong profit translation. For 2023, more than 90% of gross fee revenues will be translated into adjusted EBITDA. Furthermore, this business model has allowed Marriott to return a projected 4.1 billion to 4.5 billion dollars to its shareholders in 2023, which amounts to over 80% of its gross fee revenues.

Marriott's revenue per room (RevPAR) was $124.28 worldwide for the first two quarters of 2023. Latin America, which includes the Caribbean, had the highest RevPAR, above even the US and Canada, demonstrating the importance of the company's growth in that region. Growth was also fairly strong, with RevPAR growth estimates between 6% and 8% YoY in Q3 and 12% to 14% for FY2023. Its growth in the US and Canada has been slightly slower, at 2% to 4% in Q3 and 7% to 9% for the full year, further demonstrating the importance of its foreign expansion.

Additionally, Marriott's number of rooms is projected to have grown by between 6.4% and 6.7% YoY in Q3, showing that the company is growing steadily and not showing any signs of stagnation.

Overall, the company's strategy of franchising contributes to its financial health. In addition, it is projected to have grown significantly during the past year, which demonstrates a lot of potential for further expansion. As a whole, the company's finances are quite stable and we believe it will likely remain so for the foreseeable future.

Decent Strength Over Other Hotel Chains

When comparing Marriott's KPIs to other hotel chains, we can see that Marriott's position in the hotel industry is slightly above average.

The chain's revenue per room ( RevPAR ) of $124.28 and average daily rate ( ADR ) of $181.11 are above IHG ( IHG ) and Hilton ( HLT ) but below Host Hotels ( HST ) and Hyatt ( H ). Hilton and IHG primarily operate more affordable hotels, while Hyatt and Host Hotels primarily operate higher-end hotels. Since Marriott operates brands that cater to all price ranges, RevPAR and ADR are a balance between the other 4 competitors. Even though Marriott's occupancy rate of 68.7% is slightly below its competitors, we believe the difference is small enough to be negligible.

Marriott's revenue and EPS growth has exceeded all of its main competitors except for Hilton. The data above shows that the hospitality industry's top and bottom line is rising across the board, which has a positive impact on Marriott. While these growth figures are good, Marriott's performance has not been significantly better than the competition.

Valuation-wise, Marriott is also in the middle of the pack. Its EV/revenue is slightly above the expensive brands of Hyatt and Host Hotels, but significantly below the budget brands of IHG and Hilton. As with RevPAR and ADR, this performance is expected since Marriott operates both high-end and budget hotels.

Overall, our conclusion is that the hospitality industry as a whole is somewhat expensive but growing steadily. We believe Marriott is faring better than average in terms of revenue and EPS growth, but not to the point where it distinguishes itself in a meaningful way.

Valuation

For the Graham's Formula and Peter Lynch Valuation Models, we assume that Marriott's EBITDA and EPS growth will remain steady at 15% and 17.2% respectively over the next 3 years. We also assume that Marriott's 2024 EPS will grow a whopping 28% to $8.58. Even with these optimistic assumptions, the valuation models calculated an average fair value of $174.07, implying a 15% downside from Marriott's current market price. As such, we believe that despite its stability and steady expansion, Marriott is slightly overvalued from an independent standpoint.

When comparing Marriott's financial performance to other major hotel chains, the company outperforms in most metrics. Their projected 3-year EPS growth of 9.02% and revenue growth of 17.20% is ahead of every major competitor except Hilton. Additionally, their gross margin of 80.51% and EBITDA margin of 72.35% are ahead of all of its rivals. Marriott's forward EV/EBITDA of 15.67 and P/E of 22.71 are also relatively low. With a fairly strong edge over competition in multiple financial metrics, we believe that Marriott is undervalued from a comparative standpoint.

Forex Risk

The risks facing Marriott are very limited due to the strong rebound of tourism after the pandemic. However, Marriott faces the risk of the strengthening US dollar, which could reduce the value of its revenue from other countries. While currency fluctuations have the potential to hinder virtually any large company, Marriott's exposure to this risk is greater due to the sheer scale of its foreign business.

As a global hospitality leader, Marriott generates revenues in various foreign currencies in its international operations. Currency rate shifts can substantially increase U.S dollar expenses or reduce U.S dollar revenues, directly impacting profitability. For instance, the dollar is currently trading at $1.07 per Euro , which is well above historical averages, hurting the company's revenues from the Eurozone. We believe that forex risk should be considered as it can affect Marriott's financial performance abroad.

Conclusion

Marriott has shown decent growth opportunities and an advantageous business model, providing them with a slight edge over competitors. However, since these benefits are mostly negligible, we believe that Marriott's premium valuation cannot be justified by this. As such, we rate Marriott as a hold.

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