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Lodging Industry: Industry Valuation H, IHG, MAR, HOT

Lodging Industry: Industry Valuation H, IHG, MAR, HOT. April 28, 2014 Julia Lassarat Allie Leon Meghan Shevlin Sarah Weatherburn. Agenda. Industry Overview Growth, uncertainties & focus Competitor assumptions Sales growth, NEA, EPAT, EATO Key Industry metrics

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Lodging Industry: Industry Valuation H, IHG, MAR, HOT

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  1. Lodging Industry:Industry ValuationH, IHG, MAR, HOT April 28, 2014 Julia Lassarat Allie Leon Meghan Shevlin Sarah Weatherburn

  2. Agenda • Industry Overview • Growth, uncertainties & focus • Competitor assumptions • Sales growth, NEA, EPAT, EATO • Key Industry metrics • RevPAR, ADR, occupancy, beta, WACC • Industry Valuation • Recommendation

  3. Lodging Industry • $593B Industry consisting of 645,000 businesses and 21M rooms (high barriers to entry, highly cyclical) • 4 industry leaders make up 13.2% of market • Owned, managed and franchised hotels • Industry revenues expected growth of 2.2% expected through 2018

  4. Macro Factors effecting industry • Uncertainty & recession • Relies on disposable income levels • 70% leisure tourists, 30% business • 83% domestic, 17% international • Government regulation • Globalization • 2009 global recession weakened consumer confidence leading to financial cuts, including travel for consumers as well as business’. • Industry faced a sharp decline (7.5%) in industry revenue in 2009 • Significant growth since 2010

  5. Industry Growth • Tourism is expected to grow 3.8% through 2018 especially in emerging economies • Globalization becoming standard for developing a successful lodging venture. • Growth expected in emerging economies such as Asia, Latin America, Eastern Europe, the Middle East and Africa www.starwoodshotels.com

  6. Industry Comparables & Focus • Technology • H: “green” check-in • IHG: decrease investing heavily in new software • MAR: improve in-house technology • HOT: “Smart Rooms”, Self check-in kiosk • Manage capital • Deploy cash, reinvest, sell assets, invest in hotels, return capital to shareholders

  7. Forecasted Sales Growth

  8. Forecasting Assumptions • Hyatt • Growth of 12% with gradual decrease to 2.5% continuing value • Sales growth to support NEA (at current franchise/owned ratio) • Intercontinental • Growth of 5% expected to 2018 • 3.39% continuing growth • Marriott • Growth of 7% expected to 2021 • 3% continuing growth • Starwood • Sales growth decreasing, limited growth opportunity in mature markets • 4% continuing sales growth

  9. Forecasting EPAT Forecasted EPAT largely in line with Forecasted Sales

  10. Forecasting EPM

  11. Forecasting EPM Assumptions • Hyatt • EPM is largely dictated by RevPAR and ADR • Intercontinental • Significant historical investments in technology upgrades will raise future EPM • Starwood • EPM is brought down by building and renovating hotels • Leading to a switch from owned hotels to managed and franchised hotels

  12. Forecasting EATO

  13. Forecasting EATO Assumptions • Hyatt • Increase in EATO largely attributed to increase in sales • Intercontinental • NEA expected to fluctuate in line with sales • Marriott • Significant drop in 2014 due to increased NEA

  14. Forecasting NEA

  15. Forecasting NEA Assumptions • Hyatt • Majority of hotels are Hyatt-owned • Plans to increase franchise business model, but will not dispose of any owned hotels • Intercontinental • Decreasing owned hotels in Europe and AMEA • Marriott • Significant increase in 2014 due to addition of 100+ properties • Starwood • Majority of hotels are Starwood-owned

  16. WACC and Beta • Hyatt’s beta is much higher due to the fact that it is primarily owned rather than franchised • HOT’s beta is significantly higher than the industry due to the fact that a larger percent of their brands are luxury - revenues fluctuate more with market conditions • IHG’s WACC is the lowest due to its heavy weight on equity and lowest cost of equity

  17. Key Performance Indicators RevPAR = Room sales/total number of rooms = ADR * Occupancy ADR = Room sales/number of rooms booked Occupancy = number of rooms booked/total number of rooms

  18. ValuationAbnormal Sales Growth Model • All models yield the same value if steady state is achieved • Abnormal growth captures more value now rather than after horizon • Within the horizon we directly calculated our expectations of each individual hotel • The expectations in the short-term have been captured • Self correcting nature of accounting is central to AGR

  19. Industry Valuation

  20. Conclusion • Recommendation: • BUY • Based on analyst expectations and high hopes for future performance improvement of companies with the industry, the Lodging Industry is a BUY • Tourism growth, relaxed government regulations and improvement in global economy support this decision • Industry’s focus on customer needs and preferences encourage brand loyalty and repeat service

  21. QUESTIONS?

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