Marriott International Inc Fundamental Analysis
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Marriott International Inc
Last Updated: 16 June 2023
NASDAQ: MAR
GICS Sector: Consumer Cyclical
Sub-Industry: Lodging
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Table of Contents
You can download a summary of Marriott International Inc's fundamental analysis in PDF here.
Management
CEO: Anthony Capuano
Tenure: 2.3 years
Marriott International Inc's management team has an average tenure of 2.6 years. It is considered experienced.
Source of Revenue
Marriott International, Inc. operates, franchises, and licenses hotel, residential, timeshare, and other lodging properties worldwide at different prices and service points under 30 brand names in 138 countries and territories.
Consistent with the company’s focus on management, franchising, and licensing, Marriott International Inc owns or leases very few of its lodging properties (less than 1%).
Company-Operated Properties
These properties were either owned by Marriott International Inc or operated under long-term management or lease agreements. The management agreements involve earning a fee based on the hotel's revenues and profits and reimbursement for operational costs. The agreements typically last for 20 to 30 years, with options to renew for additional years. Lease agreements include fixed rentals and additional rentals based on a percentage of annual revenues.
Some agreements are subordinated to mortgages or liens. Owners can terminate the agreements if Marriott International Inc fails to meet performance metrics or financial returns. In certain cases, owners can convert company-operated properties to franchised properties under the Marriott brands.
Marriott International is responsible for hiring, training, supervising managers, and employees, and purchasing supplies for the facilities. Owners are required to reimburse these costs. The company also provide centralized programs and services, such as Marriott Bonvoy loyalty program, reservations, marketing, accounting, and data processing services, which owners are also required to reimburse.
Franchised and Licensed Properties
The company extends franchising and licensing arrangements to hotel owners and operators, enabling them to utilize brand names and systems. Franchisees pay an initial fee and ongoing royalties, typically based on room and food/beverage revenues. They also contribute to Marriott’s centralized programs. Royalty fees are received from former timeshare subsidiaries and affiliates, encompassing various brands such as Marriott Vacation Club, Grand Residences by Marriott,
Residential
Marriott International offers franchising and licensing agreements to hotel owners, allowing them to utilize its brand names and systems. Franchisees pay initial and ongoing royalty fees based on their room and food/ beverage revenues, while also participating in Marriott centralized programs.
Brand Portfolio
Marriott International’s brands are categorized by style of offering - Classic and Distinctive. Its Distinctive brands further offer three quality tiers: Luxury, Premium, and Select.
Luxury offers bespoke and superb amenities and services which include hotel brands like JW Marriott, The Ritz-Carlton, and St. Regis. Distinctive Luxury hotel brands include W Hotels, The Luxury Collection, EDITION, and Bvlgari.
Premium offers sophisticated and thoughtful amenities and services. Brands include Marriott Hotels, Sheraton, Delta Hotels by Marriott, Marriott Executive Apartments, and Marriott Vacation Club. Distinctive Premium hotel brands include Westin, Renaissance Hotels, Le Méridien, Autograph Collection Hotels, Gaylord Hotels, Tribute Portfolio, and Design Hotels.
Select offers smart and easy amenities and services, with longer-stay brands offering amenities that mirror the comforts of home. Brands include Courtyard, Residence Inn, Fairfield, SpringHill Suites, Four Points, TownePlace Suites, and Protea Hotels.
The company operates through two segments: 1) U.S. and Canada, and 2) International.
Marriott International Inc Reportable Segment Revenue FY2022
Marriott International Inc Economic Moat
Marriott International Inc Economic Moat
Economic Moat: Wide
There are many ways to identify Marriott International Inc’s economic moat, but I focus on the above 5 types. The rating is purely subjective and based on my in-depth understanding and analysis of Marriott International Inc. Please check my summary to understand more about the economic moat.
Performance Checklist
Is Marriott International Inc’s revenue growing YoY for the past 5 years consistently? Inconsistent.
Is the net income growing YoY for the past 5 years consistently? No.
Is the cash flow from operating activities growing YoY for the past 5 years consistently? Inconsistent.
Is the free cash flow positive for the past 5 years? Yes.
Is the gross margin % consistent/ growing for the past 5 years? Yes.
Is the EPS growing for the past 5 years? Inconsistent.
Marriott International Inc Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)
Is the free cash flow per share growing for the past 5 years? Inconsistent.
Marriott International Inc FCF per Share
Management Effectiveness
Is Marriott International Inc’s ROE consistently at 12%-15% YoY for the past 5 years? Whilst Marriott International Inc's ROE at >300% is outstanding, it is probably skewed due to their high level of debt.
Is the ROIC consistently at 12%-15% YoY for the past 5 years? No.
Marriott International Inc Return on Invested Capital vs Weighted Average Cost of Capital
The trendline for the number of shares outstanding is decreasing, which is something that an investor would be pleased to see.
Marriott International Inc Shares Outstanding (Million Shares)
Marriott International Inc Financial Health
Marriott International Inc Financial Health (USD Million)
Current Ratio: 0.47 (fail my requirement of >1.0)
Debt-to-EBITDA: 2.79 (pass my requirement of <3.0)
Interest Coverage: 8.85 (pass my requirement of >3.0)
Debt Servicing Ratio: 17.05% (pass my requirement of <30.0%)
Dividend
Current Dividend yield: 1.1%
Have the dividend payments been stable for the past 5 years? Yes.
Have the dividend payments been growing for the past 5 years? Yes.
Marriott International Inc’s dividend payments are reasonably covered by its earnings and its cash flows.
Marriott International Inc Intrinsic Valuation
Estimated intrinsic value: $78.86
Value is calculated using discounted cash flow method (taking into account their cash and debt) and scenario planning.
Average free cash flow used: USD$1,600M
Projected growth rate: 9% - 15%
Beta: 1.58
Discount rate: 9.9%
Margin of safety: 40% (Uncertainty: Mid)
Price range after the margin of safety: <$48
Date of calculation: 15 June 2023
Free cash flow used is a weighted average that is rounded to the nearest tens. In some instances, I used a more realistic number to represent the free cash flow.
Total debt and cash and short-term investments are last quarter figures that are rounded to the nearest tens. In some instances, I used more realistic numbers to represent them.
Marriott International Inc Intrinsic Valuation
Marriott International Inc Relative Valuation
Marriott International Inc EV-to-EBITDA vs its peers
Marriott International Inc Price-Earnings Ratio vs its peers
Marriott International Inc Historical Price-Earnings Ratio
Additional Resources
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My Top Concern
Marriott International Inc operates in highly competitive markets, facing competition from diverse types of accommodations, such as major hotel chains, regional hotel chains, independent hotels, and home-sharing and rental services. To maintain competitiveness and attract customers, the company employs different strategies. Failure to effectively compete could result in reduced earnings. Moreover, the introduction of new lodging options in specific markets may hurt the hotel industry and impede the company's ability to maintain or increase room rates and occupancy in those markets.
The company's global business operations are influenced by various factors, including changes in the global, national, or regional economies, governmental policies, geopolitical conditions, public health events, and social conditions. These factors can significantly affect the company's financial results and growth. They encompass weak or volatile economic conditions, pandemics, political instability, terrorism, travel disruptions, and security measures. These conditions also affect the hiring and retention of associates. Although the negative impact of COVID-19 has decreased since 2020, the company continues to experience some of these effects and may face additional effects in the future.
The company's hotel rooms are often booked through online travel intermediaries, such as Expedia, Priceline, Booking.com, Travelocity, and Orbitz, among others. These intermediaries initially focused on leisure travel but have expanded to include corporate travel and group meetings. While Marriott has implemented programs like Best Rate Guarantee and Member Rate to limit guest reliance on intermediaries and prevent undercutting of hotel rates, intermediaries still employ aggressive online marketing tactics to attract guests. This includes purchasing trademarked online keywords related to the company's brand to redirect guests to their websites. Consequently, this could harm the company's business and profitability if intermediaries successfully divert guest loyalty from Marriott's brands, steer bookings away from direct online channels, or increase the overall cost of Internet bookings through their fees.
Summary for Marriott International Inc
Marriott International Inc is widely recognized for its strong competitive advantage, which stems from its well-established brand, network effect, and high switching costs for third-party owners. These factors combine to create a wide economic moat for the company.
Marriott's brand advantage is evident in its successful expansion into new hotel brands. Over time, the company has steadily grown its brand portfolio. In 2000, Marriott had 10 brands and 2,100 hotels. By 2015, the number had increased to 19 brands and 4,400 hotels. As of 2022, Marriott proudly boasts an impressive 30 brands with over 8,000 hotels. This growth has been achieved through both the acquisition of Starwood in 2016 and organic expansion.
The acquisition of Starwood by Marriott has greatly strengthened Marriott's brand and its ability to create switching cost advantages. By combining Starwood's luxury brands with Marriott's select-service upper-scale brands, Marriott now offers the widest range of brands in the industry.
Marriott's loyalty program is one of the most robust in the industry, further solidifying its brand presence. Marriott.com boasts an impressive membership base of over 182 million loyal customers. These members account for approximately 50% of all room nights booked, highlighting the significant contribution of the loyalty program to Marriott's success.
The loyalty program also creates a network effect for Marriott International Inc. A network effect occurs when the value and benefits of a product or service increase as more people use it. As more people join Marriott's loyalty program and experience its benefits and rewards, the program becomes more attractive to potential customers. This, in turn, encourages more people to join and remain loyal to the brand, creating a positive feedback loop.
Furthermore, Marriott's extensive brand presence and hotel portfolio contribute to the network effect. As Marriott expands its footprint and offers a wide range of hotels across various locations, customers are more likely to choose Marriott due to the convenience and familiarity of the brand. This network effect further strengthens Marriott's competitive advantage and customer loyalty.
Marriott's economic moat is further supported by the consistent demand from third-party owners and the long-term contracts for its managed properties. Marriott holds a dominant position in the management of properties in the hospitality industry. Property owners who choose to delegate management duties seek a reputable brand and an experienced team capable of handling tasks such as reservations, advertising, marketing, and labour management.
Property owners and Marriott enter into managed and franchised contracts that typically last for 20 years, with the possibility of renewal for an additional 50 years. If a contract is terminated, substantial investments are required to renovate and rebrand the property according to new specifications, leading to disruptions in the owner's business operations. Additionally, the owner is responsible for paying termination fees. Due to Marriott's strong brand and expertise in management, this creates significant switching costs for the owners.
Marriott's focus on franchised and managed properties, rather than owned properties, also brings several advantages such as higher profit margins and lower capital requirements. This strategic approach results in Marriott achieving higher relative returns on invested capital, operating margins, and earnings before interest growth compared to its key competitor, Hyatt, which has a larger portfolio of owned properties.
Marriott International Inc's strong brand, extensive portfolio, and loyalty program help create a wide economic moat. The loyalty program also fosters a network effect, attracting and retaining customers. Marriott's dominance in property management, with long-term contracts and high termination costs, establishes significant switching costs for owners. With these competitive advantages, Marriott is a formidable wide economic moat company in the industry.
Marriott International Inc's performance over the past five years has exhibited a mixed performance. The company's revenue growth year-on-year has been inconsistent. Similarly, the net income has not consistently grown YoY during this period. On a positive note, Marriott International Inc has maintained positive free cash flow over this period, indicating its ability to generate cash from its operations. Moreover, the company has demonstrated consistent or growing gross margin percentage, suggesting efficient cost management, and pricing strategies.
Marriott International Inc's capital allocation strategy has been a mixed bag over the past five years. While the ROE is at an outstanding >300%, it is important to note that this figure may be skewed by the company's high level of debt. In terms of ROIC, however, Marriott International Inc has not consistently achieved the desired range of 12%-15% YoY during this period. Nonetheless, the company's ROIC remains above the industry average, indicating its ability to generate relatively higher returns on its invested capital. Furthermore, the ROIC is slightly higher than its WACC, which is a positive sign for investors. Another encouraging factor is the declining trendline for the number of shares outstanding, suggesting that the company is actively managing its capital structure and potentially enhancing shareholder value.
Marriott International Inc's financial health raises some concerns based on several key indicators. Firstly, the current ratio of 0.47 falls short of the desired benchmark of >1.0, indicating potential liquidity challenges. However, the debt-to-EBITA ratio meets the requirement, suggesting a relatively manageable level of debt in relation to earnings. On the flip side, it is worth noting that the debt-to-equity ratio has increased significantly by over tenfold in the past five years, reaching a level that is considered high. Despite this, the interest coverage ratio stands at 8.85, surpassing the requirement of >3.0 and indicating the company's ability to cover interest expenses comfortably. Moreover, the debt servicing ratio of 17.05% falls below the threshold of <30.0%, signifying a reasonable proportion of earnings dedicated to servicing debt obligations.
Investing in Marriott International Inc comes with a mix of both promising and concerning factors. On the positive side, the company enjoys a wide economic moat, which suggests a competitive advantage and the potential for long-term profitability. However, it is important to note that the company has shown unsatisfactory performance and financial health in recent times, as indicated by various metrics. This introduces an element of uncertainty into the investment decision. Given the circumstances, it would be prudent for investors to exercise caution and demand a high margin of safety. In this case, a margin of safety of at least 40% would provide a buffer against potential risks and uncertainties associated with Marriott International Inc's performance and financials. By requiring a significant discount on the intrinsic value, investors can mitigate potential losses and position themselves for better returns if the company's outlook improves.
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