Marriott International (NASDAQ:MAR) operates globally under well-known brands and has been considered as one of the largest operators of hotels and timeshare properties. MAR has been around for over 95 years now and shows impressive stability battling the pandemic well and today’s increasing cost of everything. MAR showed strength in its increasing portfolio of property and as of Q1 2022, the company has more than 8,000 properties and 1.48 million rooms available to be booked by travelers. This up from 7,900 properties last FY2021 with over 1.47 million rooms, and up from 7,600 properties and a respective room count of 1.42 million rooms in FY2020. On top of this impressive growth record, its human resources remain at 120,000 as of this writing, still below its pre-pandemic level of 174,0000 as of FY2019. Aside from this catalyst, the company managed to provide better revenue per room available (RevPAR; a metric provided by the company to calculate % change in room revenue) in terms of its total worldwide operation of 96.5% compared to Q1 2021 and still down by 19.4% compared to its Q1 2019 performance. This is quite impressive especially while looking at its peer Hilton Worldwide Holdings (HLT), who managed only to grow its RevPAR in Q1 2022 by 80.5% compared to the same period in 2021.
Technology is one of the largest growth drivers for the lodging industry and it has altered how people travel and how hotels are managed. Marriot’s plan to allocate between $600 and $700 million on their CAPEX budget for FY2022, up from $183 million recorded last fiscal year and $653 million actual CAPEX investment in FY2019, is one of the reasons why it is not a good short candidate, despite numerous macroeconomic headwinds in the present day. Its focus on its hotel tech innovation, which is expected to lead the company to new solutions addressing housekeeping efficiency and improving brand portfolio are the reasons why I believe we can see a further upward revision on its top line.
MAR does not have profitability issues; in fact, the company is starting to generate actual profits as the travel industry continues to recover from the pandemic. However, price appears to be fairly valued relative to its current valuation and a meaningful pullback will provide potential investors and traders a better risk-reward opportunity in today’s bearish market.
Still Waiting For A Big Drop
With the current market sentiment, in which many analysts are predicting a recession this year, it is prudent to search for stocks that are fairly valued and have solid fundamentals, which may provide opportunities from panic selling by others. MAR is currently fairly valued, trading below its average intrinsic value of $191ish derived from the average of a DCF model and simple relative valuation. Looking at its multiples, MAR is way undervalued compared to its peers as shown in the image below.
MAR is trading only at a trailing P/E ratio of 38.33x cheap in comparison to its peers’ average and median P/E ratio. Additionally, its EV/EBITDA ratio of 27.13x, is cheap in comparison to its forward multiple and peer’s average and median as shown in the image above. With this sentiment, it is reasonable to use a higher multiple in my DCF model. However, with the current sentiment from a soaring inflation and the ongoing Russia-Ukraine war, analysts expect US growth to slow down, which will affect the travel industry and consumer’s budget and could affect the company’s top line.
I used analysts’ estimates to complete my 5 year DCF model. I used MAR’s WACC as my discount rate to arrive at an intrinsic value of $198ish. Using a
normalized discount rate of 10% instead of 11.51% and holding all other assumptions constant will result in a higher figure of approximately $215, still providing a reason to wait for a pullback to achieve a better margin of safety. I also assumed an improving operating margin and a potential miss of this figure will have a material impact to the model.
MAR Is Stronger In Its Recent Financial Report
With MAR’s $1,053 million in total operating revenue for the first quarter of 2022, this figure is up from $536 million in the same period of 2021. The company’s trailing 12-month total operating revenue of $3,932 million represents an increase over the $3,415 million recorded in the prior fiscal year as well as the $2,119 million recorded in fiscal 2020.
Another value adding catalyst is MAR’s gross profit which increased from $410.00 million in Q1 2021 to $856 million. Additionally, its gross margin increased from 74.81% in the first quarter of 2021 to 81.29% this quarter. This is quite impressive, especially in its current operating environment. However, upon further investigation, a portion of this growth comes from subsidies under the German government for Covid-19 assistance programs.
Marriott International’s operating income increased from $85 million recorded in the same quarter last year to $567 million this quarter. Unlike its gross margin, this growth comes clearly from its strong top line and well managed expenditures. In fact, the management provided a strong outlook with their general and administrative expenses to stay below 2019. G&A and other expenses are still anticipated to be $860 million to $880 million well below 2019. (Source: Q1 2022 Earnings Call Transcript)
This snowballed into an improved operating margin of 53.85% this quarter, compared to its 15.86% posted in the same quarter of the previous year. As a result, MAR generated a higher net income of $377 million, compared to a negative bottom line of -$11,00 million recorded in Q1 2021. On top of that, this caused its net margin for Q1 2022 to increase to 35.80% from its -2.05 percent in the same quarter last year.
This affects its earnings per share (EPS) positively and increased to $1.15, up from -$0.03 recorded in the same period of the previous year. Moreover, looking at the company’s trailing EPS of $4.54, it is still higher than the $3.36 recorded last fiscal year and higher than the -$0.82 recorded in fiscal 2020.
In addition to its improving EPS trend, MAR reinstated their dividend payment beginning next quarter at a rate of $0.30 per quarter, giving investors additional incentive to purchase the stock on its pullback.
However, It Is Weakening Based On Its Weekly Chart
Looking at its weekly chart, MAR shows a weakening price action confluence with its MACD indicator. A potential bearish crossover from its MACD may indicate a short term bearish move. In my opinion, a catch near $140 level is reasonable and will provide better margin of safety and will improve its current dividend yield of 0.70% to ~0.85%.
Final Key Takeaways
MAR’s cash position decreased from $1,393 million recorded in the fiscal 2021 to currently $1,042 million. This is due to lesser issuance of debt and can be seen at its declining total debt amounting to $10,535 million, down from $11,386 million last fiscal year and down from $11,346 million recorded in fiscal 2020. With its improving profitability, MAR managed to improve its debt to EBITDA ratio of 4.23x, better than its 5.65x recorded in FY 2021 and 12.81x FY 2020. According to the management, they are near their target leverage ratio and with the continued recovery from the pandemic, they expect to resume share repurchases this FY2022. The company’s strong profitability and cash flow potential can provide its investors a growing dividend payment in the coming financial report and currently pays only an estimated 26% payout ratio. In conclusion, Marriot International is a good investment due to its strong tech innovation and improving brand portfolio ahead of an improving travel environment. Additionally, it is worth noting MAR’s strong shareholder value catalyst, which makes this stock a buy on the current weakness.
Thank you for reading and good luck everyone!