Two leading lodging analysts raised their ratings on Marriott International Inc., saying conditions are ripe in the U.S. lodging industry for a year of growth at the Bethesda hotel company.
Bear, Stearns & Co. senior managing director and lodging analyst Jason Ader last week upgraded the stocks of Marriott, Four Seasons Hotels Inc. and Hilton Hotels Corp. to "buy" from "neutral."
"After two years of disappointing growth, this industry is poised for a rebound," Ader said. "The lodging stocks are undervalued relative to many other industry stocks that are overpriced. The downside risk is limited."
Goldman, Sachs & Co. analyst Steven Kent also upgraded his position on Marriott to "market-weight."
"Lodging has underperformed for the last two years, and the stocks accurately reflected that," Kent said. "Just about everybody had turned their back on this group. Now with an economy that continues to be strong, the demand will continue and that makes supply closer to demand."
Over the past two years, investor sentiment for lodging stocks has been low as supply outpaced demand. Revenue per available room, a key performance figure for the industry, dropped, but it is expected to stabilize this year and begin a slight upward trend in 2001, the analysts said. The industry's revenue per available room grew 3.2 percent in 1999 and is expected to grow 3.8 percent in 2002, according to Bear, Stearns.
In addition, per-room profit is expected to increase over the next three years. In 1997 per-room profit hit 31 percent, but it dropped to 18 percent in 1998 and then to 4.1 percent last year, according to PricewaterhouseCoopers.
"We are bouncing off the bottom of this cycle," Kent said. "All indications of the major brands suggest that this should continue into 2000."
Ader said Marriott has strong name-brand recognition in the industry and should have increased cash flow as it builds more hotels and gains market share. Marriott plans to add 1,000 hotels by 2003. The addition of the planned 175,000 new rooms would bring the company's total to about 500,000 worldwide.
Marriott spokesman Thomas O. Marder said it "continues to be comfortable with analysts' estimates for 1999." The corporate research firm First Call's consensus Wall Street estimate for Marriott is 44 cents a share for the quarter ended Dec. 1, 1999.
In its third quarter, Marriott reported net income of $96 million--up 12 percent from $86 million the year before. Sales were $2 billion, compared with $1.4 billion the previous year.
Marriott attributed the increased profitability to its flagship brand, Marriott Hotels, Resorts and Suites, and the addition of 250 hotels. As primarily a franchiser and management company, it owns little real estate and has a low-risk profile.
"We are like the McDonald's and Wal-Marts of the world," said Laura E. Paugh, vice president for investor relations. "The more distribution you get in the market, it gives you more presence in customers' minds so they are choosing your brands. The thing we have is consistency."
Marriott will release its fourth-quarter earnings Feb. 7.
But analysts and hoteliers caution that the lodging stocks look bright only as long as the economy remains vibrant.
"Leisure travel and business travel should remain strong," Ader said. "But if the economy slows, all bets are off."
CAPTION: Marriott Stock (This graphic was not available)