We are reverting to a Neutral recommendation on the hotel company Starwood Hotels & Resorts Worldwide Inc. from Outperform given the pressure on revenues and lingering uncertainty in some geographic regions.
Why the Downgrade?
Starwood’s revenues have lost momentum in the last two quarters, increasing only 0.1% in fourth-quarter 2012 and plummeting 10.3% year over year in first-quarter 2013 due to reduced revenues at Starwood’s owned, leased and consolidated joint venture hotels and vacation ownership and residential businesses.
Despite its immense growth potential, a deteriorating political situation and inflation in Argentina and an over-valued Argentinian currency resulted in deceleration in Latin American revenues. Waning demand and rising local costs are hurting margins in the region. Moreover, revenue per available room (RevPAR) in Europe has been facing a tough situation due to austerity measures and fragile economic conditions. Long-term outlook is also not clear. Further, European corporate customers remain cautious when it comes to room rates.
With Europe and Argentina normally accounting for over 33% of owned rooms and almost 40% of owned EBITDA, we consider this sluggishness one of the major concerns in the near term. Further, in developed markets, high unemployment and mounting pressure of public and private debt has resulted in slower recovery.
However, despite these apathetic facts, some positive attributes prevent us from being too pessimistic on the stock. A strong developmental pipeline, significant international exposure, the hotelier’s asset disposition strategy, and limited asset supply in North America should prove beneficial over the long term.
Other Stocks to Consider
Other players in the same industry, which look attractive at current levels, include Marriott International Inc. (MAR - Free Report) , Marriott Vacations Worldwide Corp. (VAC - Free Report) and Home Inns & Hotels Management Inc. . While Marriott International carries a Zacks Rank #2 (Buy), Marriott Vacations and Home Inns carry a Zacks Rank #1 (Strong Buy).