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Marriott Rides on Expansion & Initiatives, Revenue Woes Stay

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On Sep 8, we issued an updated research report on Marriott International, Inc. (MAR - Free Report) .

Though the company has solid long-term growth potential but the risks from near-term headwinds might somewhat restrict its growth momentum.

Acquisitions to Boost Growth

Marriott continues to rely on acquisitions in order to expand its footprint. After announcing the acquisition of Starwood Hotels & Resorts on Sep 23, 2016, Marriott has become the world’s largest hotel company, spanning across 125 countries with more than 6,200 properties.

Post-acquisition, shares of the company have rallied 48.7% since the date while the broader S&P 500 index has gained 13.4% in the same time frame.

Moreover, Marriott's distribution has more than doubled in Asia and the Middle East & Africa combined with the purchase of Starwood. Also, the company believes that the deal will be accretive to cash flow and earnings by the second year following closure and result in annual cost savings of at least $250 million on the back of lower operating, and general & administrative expenses.

Also, Marriott became the largest hotel company in Africa with the Protea Hospitality Group buyout in 2014. This was followed by the acquisition of Delta Hotels and Resorts brand in 2015.

Interestingly, even with 30 brands under portfolio, the company has not ruled out further mergers and acquisitions activities. Holding about 14%–15% market share in the United States alone, Marriott is well-positioned to capitalize on the existing growth potential.

Solid Expansion Plans

Marriott’s extensive portfolio and a strong brand position allow it to charge a premium room rate in the highly competitive lodging industry. Given its property locations, we believe that the company is well poised to benefit from the increasing market demand backed by stepped up business as well as leisure traveling.

Notably, in addition to domestic markets, Marriott is consistently trying to expand its presence worldwide and capitalize on the demand for hotels in the international markets. Going forward, the company plans to significantly grow its global portfolio of luxury and lifestyle brands. In fact, it anticipates net room additions of 6% in 2017.

Outside the United States, the hotel company is trying to expand its footprint, especially in Asia, Latin America, Middle East and Africa. Meanwhile, Marriott’s European pipeline has grown consistently in the recent past and is expected to continue, going forward.

Further, it is to be noted that China is the largest source market for outbound travel now, with 700 million trips projected over the next five years. Thus, the company aims to broaden its offerings of guest amenities and services appealing to Chinese travelers in more hotels. In this regard, Marriott expects its new joint venture with Alibaba to aid in capturing a greater share of this growing Chinese travel market, thereby growing membership of its loyalty programs and reducing distribution costs.

All in all, we expect the company’s continuous expansion plans to add immensely to the top line and boost its overall performance as well.

Other Prospects

Digital innovations and social media are starting to play an increasingly important role in hotel bookings. Marriott too has rolled out guestVoice to measure guest feedback, introduced SPG Mobile check-in and check-out in North America, and achieved procurement and OTA cost savings.

Additionally, post its Starwood acquisition, the company has linked industry-leading guest loyalty programs — Marriott Rewards, Ritz-Carlton Rewards and Starwood Preferred Guest — and announced the matching of member status between the programs, thus leading to an even larger loyalty community.

These investments in technology for hotel bookings are likely to improve guest experience and thus boost occupancy in the long run.

Most importantly, frequent share buybacks and continuous increase in quarterly dividend payments affirm the company’s optimistic outlook and growth prospects.

Potential Headwinds to the Top Line

Despite immense growth potential, a sluggish economy in Brazil is weighing on demand in the Latin American region. In the Middle East, political unrest and low oil prices also continue to hurt tourism.

Meanwhile, in the domestic market, the company is facing increased competition in New York due to oversupply of hotels. Furthermore, soft demand in the oil producing regions is expected to continue hurting RevPAR (Revenue per Available Room).

Also in Europe, economic/political conditions are expected to remain challenging post-Brexit. Given Marriott’s considerable presence therein, this might limit its business growth. Additionally, soft economic conditions in France and terror threats in some major locations are expected to hurt revenues of the company.

Marriott’s considerable international presence also makes it highly vulnerable to fluctuations in exchange rates. In addition, significant currency headwinds are affecting most hotel companies across the world, including Hyatt Hotels Corp. (H - Free Report) , Hilton Worldwide Holdings (HLT - Free Report) , Wyndham Worldwide Corp. (WYN - Free Report) , etc. This volatility is expected to prevail in the near term.

Currently, Marriott carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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