A good time to buy? Mariott Internatinal, Inc

Business Summary

Marriott International is a worldwide operator and franchiser of hotels and related lodging facilities, an operator of senior living communities, and a provider of distribution services. As of September 2001, the lodging business included 2342 properties. During the 36 weeks ending on September 7, 2001, sales increased 5% to $7.22B. The total for the fiscal year ending December 28, 2001 is $10.152B, an increase of 0.7% over the previous fiscal year. The Chairman of the Board in the most recent 10-k explains this change in trend:

Analysis

Question 1. Is the price of the stock in the buy zone of greater than $10 and less than $60?

Since 1998, the Marriott International, Inc has charted a price of stock as indicated on the chart below. Also, compare the price of the Marriott stock with the Dow Jones Industrial Average (DJIA) and the S&P 500 Average.

F
igure 1: Marriott International stock prices since March 1998.⁵
Marriott stock prices have consistently sold between $20 and $50.

Response to question 1 is YES.

Question 2. Does the company keep their debt “reasonable”?

Marriott International has a long-term debt/equity ratio of 0.62. Borrowing money is a part of doing business. This money is used to cause growth in the company. The company must not go to extremes, as cash flows in time of trouble will not service higher debt. Due to the downturn in the world economy since September 2001, Marriott had to take extreme measures to stem the outflow of money. They stated in their most recent 10-k:

The Company has experienced a significant decline in demand for hotel rooms in the aftermath of the September 11, 2001 attacks on New York and Washington and the subsequent dramatic downturn in the economy. This decline has resulted in reduced management and franchise fees, cancellation of development projects, and anticipated losses under guarantees and loans. We have responded by implementing certain company wide cost-saving measures, although we do not expect significant changes to the scope of our operations. As a result of our restructuring plan, in the fourth quarter of 2001 we recorded pretax restructuring costs of $124 million, including (1) $16 million in severance costs; (2) $20 million, primarily associated with a loss on a sublease of excess space arising from the reduction in personnel; (3) $28 million related to the write-off of capitalized costs relating to development projects no longer deemed viable; and (4) $60 million related to the write-down of the Village Oaks brand of companion-style senior living communities, which are now classified as held for sale, to their estimated fair value. Detailed information related to the restructuring costs and other charges, which were recorded in the fourth quarter of 2001 as a result of the economic downturn and the unfavorable lodging environment is provided below.
Restructuring Costs
Severance
Our restructuring plan resulted in the reduction of approximately 1,700 employees (the majority of which were terminated by December 28, 2001) across our operations. We recorded a workforce reduction charge of $16 million related primarily to severance and fringe benefits. The charge does not reflect amounts billed out separately to owners for property-level severance costs. In addition, we delayed filling vacant positions and reduced staff hours.
Facilities Exit Costs
As a result of the workforce reduction and delay in filling vacant positions, we consolidated excess corporate facilities. We recorded a restructuring charge of approximately $15 million for excess corporate facilities, primarily related to lease terminations and non-cancelable lease costs in excess of estimated sublease income. In addition, we recorded a $5 million charge for lease terminations resulting from cancellations of leased units by our corporate apartment business, primarily in downtown New York City.
Development Cancellations and Elimination of Product Line
We incur certain costs associated with the development of properties, including legal costs, the cost of land and planning and design costs. We capitalize these costs as incurred and they become part of the cost basis of the property once it is developed. As a result of the dramatic downturn in the economy in the aftermath of the September 11, 2001 attacks, we decided to cancel development projects that were no longer deemed viable. As a result, we expensed $28 million of previously capitalized costs. In addition, management has begun to actively engage in efforts to sell 25 Village Oaks senior living communities. These communities offer companion living and are significantly different from our other senior living brands. As a result of the plan to exit this line of business, the assets associated with the 25 properties have been reclassified as assets held for sale and have accordingly been recorded at their estimated fair value, resulting in an impairment charge of $60 million.
Other Charges
Reserves for Guarantees and Loan Losses
We issue guarantees to lenders and other third parties in connection with financing transactions and other obligations. We also advance loans to some owners of properties that we manage. As a result of the downturn in the economy, certain hotels have experienced significant declines in profitability and the owners have not been able to meet debt service obligations to the Company or in some cases, to other third-party lending institutions. As a result, based upon cash flow projections, we expect to fund under certain guarantees, which are not deemed recoverable, and we expect that several of the loans made by us will not be repaid according to their original terms. Due to the expected guarantee funding deemed non-recoverable and the expected loan losses, we recorded charges of $85 million in the fourth quarter of 2001.
Accounts Receivable - Bad Debts
In the fourth quarter of 2001, we reserved $17 million of accounts receivable following an analysis of these accounts which we deemed uncollectible, generally as a result of the unfavorable hotel operating environment.
Asset Impairments
The Company recorded a charge related to the impairment of an investment in a technology-related joint venture ($22 million), losses on the anticipated sale of three lodging properties ($13 million), write-offs of investments in management contracts and other assets ($8 million), and the write-off of capitalized software costs arising from a decision to change a technology platform ($2 million).⁶
Response to question 2 is NO.

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