Starwood Hotels & Resorts Annual Valuation – 2014 $HOT

star200Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies for the Defensive Investor Near 52 Week Lows.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Starwood Hotels & Resorts (HOT) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): 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).
HOT Chart

HOT data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. 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
  6. Moderate PEmg ratio – PEmg is less than 20 - FAIL
  7. 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

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $83.38
MG Value $81.90
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
PEmg 31.77
Current Ratio 1.09
PB Ratio 4.84

Balance Sheet – 3/31/2014

Current Assets $2,063,000,000
Current Liabilities $1,893,000,000
Total Debt $1,500,000,000
Total Assets $8,752,000,000
Intangible Assets $2,007,000,000
Total Liabilities $5,435,000,000
Outstanding Shares 192,640,000

Earnings Per Share

2014 (estimate) $2.75
2013 $2.92
2012 $2.39
2011 $2.57
2010 $1.63
2009 $0.00
2008 $1.37
2007 $2.57
2006 $5.01
2005 $1.88
2004 $1.72

Earnings Per Share – ModernGraham

2014 (estimate) $2.62
2013 $2.34
2012 $1.90
2011 $1.65
2010 $1.49
2009 $1.67

Dividend History

HOT Dividend Chart

HOT Dividend data by YCharts


Starwood Hotels & Resorts is not suitable for either the Defensive Investor or the Enterprising Investor.  In fact, the only things the Defensive Investor likes about the company are the fact that it has a market cap greater than $2 billion and the fact that its dividend record.  The Enterprising Investor has significant concerns with the level of debt relative to the current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.49 in 2010 to an estimated $2.62 for 2014.  This level of earnings growth supports the market’s implied estimate of 11.63% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Starwood Hotels & Resorts (HOT)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Starwood Hotels & Resorts (HOT) or 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.  Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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