A good time to buy? Mariott Internatinal, Inc
Question 3. Does the company pay a dividend?
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- Question 4. Are the historical and projected earnings positive
- Question 5. Is management controlling costs and revenue
- Other issues
- Price/Earnings Discussion
Question 3. Does the company pay a dividend?Since its inception in 1998, the company has paid a cash dividend, and that dividend has consistently increased through the years. Figure 2 indicates dividend payout per share (MAR is Marriott International Stock Symbol). F T Figure 3: Histories of Earnings per Share, Marriott International, Inc.8 As shown in figure 3, the terrorist attacks in 2001 impacted the earnings per share. Figure 4 shows Marriott projects earnings of 15.17% over the next five years. This is a difficult rate to sustain, so careful scrutiny of the corporate trends will need to take place to ensure they fulfill this expectation. F Response to question 4 is YES. Question 5. Is management controlling costs and revenue?This question is one of the most difficult to assess. One of the approaches that analysts suggest to answer this question is to determine the company’s historical pretax profit margin and compare that to the industry average over the same period. Many analysts, however, insist this cannot be assessed unless the company has existed as a unique entity for at least 10 years. Since its inception in 1998, Marriott International, Inc. has maintained a pretax profit margin of between 3% and 8%. The industry average is around 13% over the last 5 years.  Figure 5: Pre-tax Profit Margin for Marriott International, Inc.10 Marriott International, Inc. has not kept pace with the industry average. While they have experienced a positive pretax profit margin, they do not stay abreast of other industry leaders. Another important indicator of management costs and revenue control is the return on equity (ROE) compared to industry and to the company’s historical ROE. Marriott’s most recent fiscal year end ROE of 6.80% is below its five-year average of 12.60%, and it is below the five-year industry average of 12.90% Declining ROEs are "red flags" that should be studied. They may indicate increasing competition, rising labor and raw material costs, or product quality problems plaguing the company. A potential investor should check Marriott’s quarterly report for recent improvement in the company's return on equity. F Figure 7 demonstrates a dramatic ROE decline; which in this case may be partially explained by the impacts of the terrorist attacks. Management has initiated a process to mitigate the cash flow problems that have resulted since September 2001. An interesting note is that compared to similar companies in 2001, Marriott leads its competition in return on equity, return on assets, and return on invested capital. F F The response to this question, as mentioned previously, is difficult. Although Marriott is not exhibiting remarkable performance at present, it is the largest corporation of its kind and seems able to hold its own in the industry. The response to this question is NEUTRAL. Other issuesIntrinsic valueHow is the stock priced per calculated value of the stock? The answer to this question yields interesting information regarding the company and its perceived strength by corporate and individual investors. An intrinsic value/share is a hypothetical value based on the sum of a company's future earnings. This value can be compared to a stock's current price to help determine if a stock is overvalued or undervalued. Assumptions and data required for this calculation are:
If we assume initial earnings of $236 million grow at a rate of 15.17%, and we discount those future earnings at a rate of 18.00%, we arrive at a net present value for the company's next 10 years of earnings of $2.07 billion. To account for potential earnings beyond the 10th year, we estimate a growth rate of 6.00%, a discount rate of 12.00%, and we arrive at a continuing value of $3.27 billion. To complete the calculation, we add these two figures together, subtract the long-term debt for Marriott ($2.82 billion), and divide by the outstanding shares (242 million) to get a per share intrinsic value of $10.46. Given the above earnings and discount rate, Marriott must grow earnings at a rate of 28.3% annually for 10 years to justify its current stock price of $44.14. 
Figure 9: Intrinsic Stock and Current Stock Selling Prices.15 The stock is currently selling much higher than this analysis recommends. This is an indication there is risk in purchasing this stock at this time. Price/Earnings DiscussionPrice/earnings (P/E) and price/sales (P/S) ratios measure how the market values a stock compared to its earnings, sales, and estimated earnings growth. A low P/E ratio (in comparison to the industry) indicates the market is undervaluing a stock. The P/S ratio is especially important when the company has no reported earnings (and thus no P/E). Marriott’s P/E ratio is currently at 44.2 and is 34.55% lower than the industry average, which indicates investors are buying Marriott’s earnings at a discount. This lower valuation may indicate a bargain, but could also represent the market's low expectations for the company. Since earnings tend to fluctuate and can often distort the P/E ratio, investors should confirm the valuation by looking at P/S and other similar ratios Marriott’s P/S ratio is currently at 0.98, and is 79.73% lower than the industry average, which indicates that investors are buying Marriott’s revenue at a significant discount. This may be an indication of lower margins (ability to convert sales to earnings) or below-average sales growth. 
Figure 10: P/E and P/S Values for Marriott International, Inc. For this stock, it is important to consider the life cycle phase of the industry. The phases for an industry can be classified as pioneer, growth, mature, or declining. In the pioneer phase, product acceptance is questionable, and implementation of the business strategy is unclear. Companies in a pioneer industry are usually high risk. In the growth phase, product acceptance is established and sales and earnings for the industry are accelerating. Companies in an industry in this phase must still properly execute their business strategy. In the mature phase, the industry growth mirrors that of the general economy. Companies in a mature industry are often forced to gain market share by stealing it from other companies. Finally, in the declining phase, shifting tastes or technologies have eroded the demand for the products. Companies in a declining industry often consolidate to remain profitable, or diversify into other industries altogether. Marriott is somewhere between the mature phase and the declining phase. The management team seems to be aware of the company’s situational phase, and in the past, they have reacted to the changing phases in a competent and proactive way. There are issues they must deal with now, however, as illustrated in the figure below. Figure 11 shows Marriott trailing industry in a comparison of P/E and P/S over a 12-month period. 
Figure 11: Trailing 12 Months P/E and P/S comparison with industry. Download 189.26 Kb. Share with your friends:
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