Host Hotels and Resorts Inc. Annual Valuation – 2015 $HST

Host_Hotels_&_ResortsBenjamin 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 Most Undervalued Companies for the Defensive Investor – February 2015.  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 Host Hotels and Resorts Inc. (HST) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Host Hotels & Resorts, Inc. (Host Inc.) operates as a self-managed and self-administered real estate investment trust (REIT). Host Inc. owns properties and conducts operations through Host Hotels & Resorts, L.P. The Company had approximately 114 luxury and upper-upscale hotels containing approximately 60,000 rooms, with the majority located in the United States of America, and 15 properties located outside of the United States, in Canada, New Zealand, Chile, Australia, Mexico and Brazil. In addition, the Company owns non-controlling interests in two international joint ventures: a joint venture in Europe, which owns 19 luxury and upper upscale hotels with approximately 6,400 rooms in France, Italy, Spain, The Netherlands, the United Kingdom, Belgium, Poland and Germany; and a joint venture in Asia/Pacific, which owns one hotel in Australia and minority interests in two operating hotels in India and five additional hotels in India under development.

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 - FAIL
  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 - PASS

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 - PASS
  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 - FAIL
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $21.43
MG Value $23.54
MG Opinion Fairly Valued
Value Based on 3% Growth $8.86
Value Based on 0% Growth $5.20
Market Implied Growth Rate 13.28%
NCAV -$5.82
PEmg 35.05
Current Ratio 1.71
PB Ratio 2.22

Balance Sheet – September 2014

Current Assets $418,000,000
Current Liabilities $244,000,000
Total Debt $4,012,000,000
Total Assets $12,135,000,000
Intangible Assets $0
Total Liabilities $4,820,000,000
Outstanding Shares 756,400,000

Earnings Per Share

2014 $1.50
2013 $0.42
2012 $0.08
2011 -$0.02
2010 -$0.21
2009 -$0.45
2008 $0.72
2007 $1.30
2006 $1.45
2005 $0.37
2004 -$0.12

Earnings Per Share – ModernGraham

2014 $0.61
2013 $0.10
2012 -$0.03
2011 $0.03
2010 $0.22
2009 $0.52

Dividend History

Conclusion:

Host Hotels and Resorts Inc. is not suitable for the Enterprising Investor or for the Defensive Investor.  The Defensive Investor is concerned by the the low current ratio, the insufficient earnings growth or stability over the last ten years, inconsistent dividend record, and the high PEmg ratio.  The Enterprising Investor is concerned by the level of debt relative to the net current assets and the lack of earnings stability in the last five years.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time.  From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $0.22 in 2010 to $0.61 for 2014.  This level of demonstrated growth supports the market’s implied estimate of a 13.28% annual earnings over the next 7-10 years, leading the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.

Be sure to check out previous ModernGraham valuations of Host Hotels and Resorts Inc. (HST) for greater perspective!

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 Host Hotels and Resorts Inc. (HST)?  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 Host Hotels and Resorts Inc. (HST) 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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