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Morningstar | Marriott's Brand Advantage Intact Despite Some Industry Slowdown; Shares Fairly Valued

Although Marriott saw some weakness in its core North American region with 0.6% revPAR growth versus 1.5%-2% guidance, we don't plan a material change to our $122 valuation, as we have long modeled for industry demand decelerating in 2019-20. After a 25% correction in share price since early 2018, Marriott is trading near our fair value estimate. And while Marriott has the strongest brand advantage in the industry (source of its narrow moat), we would recommend waiting for a larger margin of safety, especially given our view of decelerating industry revPAR in 2019-20.

Marriott posted 1.9% revPAR growth driven by strong 5.4% international growth. But North American revPAR growth of 0.6% was a disappointment relative to narrow-moat peers Hyatt and Hilton's 1.4% and 1% U.S. revPAR lifts, respectively. Marriott saw some weakness in September, but commented that demand improved in October. Also, we believe some of the underperformance is due to Marriott's efforts to drive direct bookings versus OTA demand, which should aid the company's long-term brand advantage. Specifically, Marriott is rolling out a new reservation platform that utilizes analytics to reduce OTA business during peak occupancy nights, and the company is saying that its direct booking mix is increasing as a result. Still, Marriott now expects 2018 revPAR growth of 3% versus 3%-4% prior, and we plan to slightly lower our 3.5% estimate as a result. Marriott also guided for 2%-3% revPAR lift in 2019, and we plan to maintain our 2% forecast.

Marriott's brand advantage is supported by solid development with its 471,000 room pipeline growing 5% and representing one of three U.S. industry rooms under construction. This supports our view that Marriott stands to see mid-single-digit annual room growth the next 10 years, well above the 2% lift seen on average in the industry. Marriott's guidance of 5% and 5.5% net unit growth in 2018 and 2019, respectively, is near our 5.4% and 5.7% respective estimates.

Marriott maintains the industry's largest loyalty program with 120 million members (InterContinental has over 100 million and Hilton is next with 82 million). Further, since integrating the Starwood loyalty program in August, the company has seen a pick up in member bookings with a growing mix occurring on direct digital channels (superior economics to indirect channels). We continue to view Marriott's leading loyalty program as supportive of its brand advantage.