EUR 850.00 For Business Accounts Only

Morningstar | Marriott Provides More Evidence of a Cyclical Slowdown; Shares Fairly Valued

We saw signs of macroeconomic slowing in Marriott's fourth-quarter results, echoing recent comments from other narrow-moat travel companies (Booking, Expedia, and Amadeus) and causing the company to lower its total 2019 growth outlook for revenue per available room to 1%-3% from 2%-3%. Having already largely accounted for this deceleration (our model calls for 2% revPAR lift this year), we don't plan any material change to our $123 fair value estimate. While Marriott's brand advantage, the source of its narrow moat, continues to strengthen, we think shares are fairly valued.

North America (68% of total fees) fourth-quarter revPAR grew just 0.2%, below Marriott's 1% guidance. While union strikes, which have now ended, created around a 50-basis-point headwind in the quarter, we believe that trade-war rhetoric and the U.S. government shutdown continued to cause some pause in travel. That said, some demand has rebounded in early 2019, with corporate clients sounding less fearful in conversations with the company. Therefore, Marriott maintained its 2019 revPAR outlook of 1%-3% growth for the region.

Fourth-quarter 4% revPAR growth outside of North America was also below guidance of 5%-6%. Despite healthy U.S. travel to London, China (Asia-Pacific is 15% of total fees) demand weakened throughout 2018 on trade-war concerns and slowing economic growth, while Europe saw a clear slowing in leisure travel in places like Paris due to anti-government protests. Although Marriott is more encouraged with recent trade-war rhetoric, it lowered its 2019 international revPAR forecast to 2%-4% from 3%-5%, which assumes no business disruption from Brexit, a downside risk to our forecast.

Marriott's brand continues to strengthen. 2018 5% net unit growth (versus our 5.5% estimate), remains well above the 2% supply growth of the U.S. industry, and Marriott expects the metric to accelerate to 5.5% in 2019 (5.7%), as Starwood brand terminations from its portfolio review ease.

The 5%-plus annual net unit growth we forecast for Marriott over the next five years is supported by its large pipeline of 478,000 rooms (36% of its existing base), which is up from 471,000 and 465,000 in the prior quarter and year, respectively. Marriott currently has 20% worldwide share of rooms under construction, well above its existing 7% global room share. In its core North American market, Marriott has 36% of all industry rooms under construction versus its 15% existing room share. We believe this supports our view that the company can gain room share with a strengthening brand advantage.

Further, the company's industry-leading 125 million loyalty members and direct booking campaign also support its competitive positioning. We found it interesting to hear that direct digital now accounts for 28% of Marriott's total bookings, up 11% from 2017, while the online travel agency channel, or OTA, remained flat at around 11% of its total bookings, the first time OTA mix did not increase in several years. While we think the OTA share mix was influenced by Marriott's changing commission rates across this channel, it still speaks to success the company is having in driving direct business and warrants monitoring for potential implications to Booking Holdings and Expedia. At this juncture, we see Booking Holdings and Expedia's network advantages as firmly intact, supported by stable to increasing take-rate trends across their platform.