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Morningstar | Marriott's 2019 Outlook and Strengthening Brand Advantage Intact; Shares Fairly Valued

Marriott’s first quarter offered no reason to materially change our $127 fair value estimate, which incorporates high-single-digit average sales and EBITDA growth over the next five years, or to alter our long-held view that the firm's brand advantage, the source of its narrow moat, is strengthening. We see the shares as fairly valued.

Although first-quarter growth in revenue per available room of 1.1% was at the lower end of Marriott's 1%-3% guidance, stronger April group bookings and an improved calendar on easier year-ago comparisons in the second half of the year left the company’s 2019 1%-3% revPAR guidance unchanged. We view this forecast as reasonable and don’t plan to alter our 2019 2% revPAR growth estimate.

We remain encouraged by Marriott’s competitive positioning, driven by the industry’s largest loyalty program of 130 million members, up 5 million from last quarter, which represents around 50% of total room night stays for the company. Also, Marriott's direct website bookings rose 20% while transactions on online travel agent platforms dropped 4%, as the company continued efforts to leverage data analytics to efficiently allocate rooms across distribution channels, an initiative that laps later this year (we see OTA channels remaining a crucial channel for all hoteliers and do not see this data point as a materially negative read-through for this industry).

Further, Marriott saw a 100-basis-point revPAR index (a metric of share) lift in the quarter, highlighting the strength of its brand. This loyalty demand, distribution platform, and brand quality encourage third-party hoteliers to join the Marriott portfolio, evidenced by a 5.3% net unit lift in the quarter, above long-term U.S. industry supply growth of 2%. Additionally, Marriott’s pipeline represents around 20% of all global rooms under construction (above its 7% existing share) and provides high visibility on our mid-single-digit average room growth forecast over the next five years.

We do not expect Marriott’s entry into home vacation rentals to be material to the company’s financials over the foreseeable future, although we think it can add some incremental value to the company’s loyalty program. In our view, it will be challenging to scale a high-end, reliable home rental experience, which will be a requirement for Marriott, so as not to risk its brand advantage. Currently Marriott offers around 2,000 vacation homes, which compares with the roughly 2 million alternative accommodation properties available through narrow-moat companies Airbnb, Expedia (through its Vrbo brand), and Booking Holdings. Marriott is also aware that it will need to communicate its plans for vacation rentals with its core franchisee, so not to disturb future net unit growth, a key driver for the company. These risks might be reasons that narrow-moat peers Hyatt and Hilton are currently not entering the vertical. That said, we do think this adds some value to Marriott’s loyalty program, as reward points are able to be used across a wider array of accommodations.