Starwood Upgraded to Outperform

On Feb 22, we upgraded our recommendation on Starwood Hotels & Resorts Worldwide Inc. (HOT - Analyst Report) to Outperform based on better-than-expected fourth-quarter 2012 results.

Why the Upgrade?

Starwood’s fourth-quarter 2012 earnings and revenues comprehensively surpassed the Zacks Consensus Estimate. Revenue per available room (RevPAR) in all regions registered a modest rise in the quarter. Improving trends in the North American business, significant international exposure and portfolio restructuring should also augur well for Starwood.

Owing to a gradual economic recovery, system-wide occupancies at Starwood hotels in North America appear to be pretty steady and above the prior peak level in 2006. Starwood opened 23 hotels in North America in 2012 and signed several new deals, much more than it had done in the past couple of years. Starwood expects 2013 to be its strongest year in terms of hotel openings in North America since the recession.

The hotelier is also poised to tap the reviving economic condition in the emerging markets. More than half of the hotel’s properties are situated outside the U.S., which gives the company wide international exposure, unlike many of its peers. Markets within Asia-Pacific and Latin America promise immense growth potential with visits expected to increase substantially going forward.

Asset disposition remains another bright spot for the company. This strategy paves the way for the company to attain higher financial flexibility. In a cutthroat competitive environment, Starwood is also deploying its capital to renovate its assets as lucrative leisure destinations.

Management also expects accelerated growth in the Chinese market post Government transition and fewer concerns in Europe in 2013 to aid the company’s earnings. Moreover, share repurchase activity and dividend distribution are the other positives.

Other Stocks to Consider

Other players in the hotels sector that are currently performing well include Choice Hotel International Inc. (CHH - Snapshot Report), Wyndham Worldwide Corp. (WYN - Analyst Report) and Intercontinental Hotels Group plc (IHG - Snapshot Report). All these companies carry a Zacks Rank #2 (Buy).