Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Undervalued Companies for the Defensive Investor Near 52 Week Lows.Â Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Starwood Hotels & Resorts (HOT)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Starwood Hotels & Resorts Worldwide, Inc. (Starwood) is a hotel and leisure company. The Company conducts its hotel and leisure business both directly and through its subsidiaries. Its brand names include St. Regis (luxury full-service hotels, resorts and residences), The Luxury Collection (luxury full-service hotels and resorts), W (luxury and upscale full service hotels, retreats and residences), Westin (luxury and upscale full-service hotels, resorts and residences), Le Meridien (luxury and upscale full-service hotels, resorts and residences), Sheraton (luxury and upscale full-service hotels, resorts and residences), Four Points (select-service hotels), Aloft (select-service hotels), and Element (extended stay hotels). The Company is organized into two business segments: hotels and vacation ownership and residential. In May 2014, the Company sold its leasehold interest in Park Lane Hotel, London to Sir Richard Sutton’s Settled Estates (SRSSE).
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$38.06|
|Value Based on 0% Growth||$22.31|
|Market Implied Growth Rate||11.63%|
|Net Current Asset Value (NCAV)||-$17.50|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Starwood Hotels & ResortsÂ is not suitable for either the Defensive Investor or the Enterprising Investor. Â In fact, the only things the Defensive Investor likes about the company areÂ the fact that it has a market cap greater than $2 billion and the fact that its dividend record. Â The Enterprising Investor has significant concerns with the level of debt relative to the current assets. Â As a result, value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities. Â As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.49Â in 2010 to an estimated $2.62Â for 2014. Â This level of earnings growth supports the market’s implied estimate of 11.63% earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative toÂ the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Starwood Hotels & Resorts (HOT)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold a position in Starwood Hotels & Resorts (HOT)Â orÂ in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.