Starwood Focuses on North America

Starwood Hotels and Resorts Worldwide Inc. (HOT - Analyst Report) signed 25 new deals and opened over 40 hotels in its North America Division in 2009. The company expects to open 20 more hotels by the end of this year. Globally, Starwood is on a voyage to open its 1000th hotel and resort.

Starwood's focus on developer-centric conversion has contributed to large scale hotel openings and new deal signings this year, which is in line with the company's strategy of long-term sustained growth in North America.

We believe the strength of Starwood's brands allow it to charge a premium for its hotel rooms. Given its property locations and strong brand recognition, we think that the company is well positioned to benefit from business travelers going to major North American destinations. Furthermore, as the demand environment improves, HOT should benefit from business travelers going to international locations as well.

Both business and leisure travel have decreased significantly in the past two quarters, due to the economic turmoil. Corporations across the globe have curtailed expenses and restricted business trips and retreats. As a result, hotel operators like Starwood and Marriott International Inc. (MAR - Analyst Report) were forced to depend on leisure travelers, who are more vulnerable to price shifts. Thus, their balance sheets have been severely impacted.

However, Starwood's second-quarter earnings of $0.22 per share were ahead of the Zacks Consensus Estimate, driven by cost reduction initiatives. The fact that Starwood was able to post earnings as strong as it did amid substantial declines in revenue per available room (RevPAR) is impressive, in our opinion.

However, management issued an earnings guidance that was below our expectations. Both revenue and margins remain curtailed, reflecting weak demand and a challenged pricing environment in the quarter.

Though we believe Starwood is well positioned for the long-term, we expect operating conditions to weaken further before improving. As such, we have a Neutral recommendation on its shares.