Inside Wall Street: Investors Are Resting Well With Starwood

Gene Marcial's Inside Wall StreetOne reliable indicator that the global economy is on the mend is the recovery in the hotel-lodging business, which is being buoyed by the upswing in travel worldwide. The hot stock in the group is Starwood Hotels & Resorts Worldwide (HOT). It has streaked from $42 a share in July to nearly $60 on Dec. 14, not far from its 52-week high of $61.69.

The brisk run-up has predictably attracted a lot of profit-taking and has prompted cautious reckoning by some analysts. But it has also convinced Starwood's more bullish adherents that the stock has firepower to spare as the company continues to demonstrate solid leadership.

"Starwood remains our top pick across our coverage space, and we are raising our earnings and price target to reflect our confidence in the hotel cycle and our belief that it will be lengthy," says Steven Kent, hotel and lodging analyst at Goldman Sachs.

Rating the stock a buy, the analyst is bullish on Starwood's prospects for the next three years. He has consequently raised his 12-month price target to $71 a share from $64, anchored on the improved earnings picture he sees.

Big Names Under Its Umbrella

Starwood is one of the world's largest hotel companies, with 992 hotels in about 100 countries. Of the total, Starwood owns 63. It manages or operates 440 as joint ventures, and 476 are franchised. Starwood has under its wings some of the best-known hotel brands. They include St. Regis -- a line of luxury hotels and resorts; Westin, another group of upscale full-service hotels; and W hotels, which are mostly boutique urban hotels.

Another analyst who's bullish on Starwood is Rachael Rothman of research and investment outfit Susquehanna International Group. She has boosted her 12-month price target to $69 a share from $60. She remains positive on the stock, she says, given the better-than-expected revenue-per-room trends in its latest fiscal quarter, significant growth in the upcycle business and some potential catalysts related to the company's ongoing transition to becoming an 80% fee-based business model.

Goldman Sachs's Kent expects earnings growth to rise at Starwood in part because it has taken out 8% of hotel costs, which the analyst says should structurally improve margins. He also expects the generation of considerable free cash flow over the next several years as the company's Bal Harbor and other time-share projects are monetized or sold.

"Large-scale asset sales may be spread out over time as management is comfortable with riding the upcycle owning assets and will only sell its premier assets for the right price," says Kent.

Hotel Rooms Are Growing Scarcer

A big part of Starwood's growth is due to its foothold in some key foreign markets. By being the largest branded hotel chain in China and India, Kent believes Starwood is in a unique position to not only benefit from intracountry travel in those markets but also from outbound travel.

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The analyst has raised his earnings estimates based in part to better-than-expected revenue growth throughout the major gateway U.S. cities as well as in the international markets. And supply, he notes, remains tight because there has been little to no new construction of hotels and lodging units.

Kent also notes that given Goldman's positive and increased global economic forecast, Starwood should disproportionately benefit given its global footprint. So, he has raised his 2012 earnings estimate to $2.35 a share from $2, and his 2011 forecast to $1.65 from $1.56. For 2010, he upped his estimate to $1.13 a share from $1.12. In 2009, Starwood earned $1.01 a share.

Indeed, Starwood is enjoying an upward drive after going through and surviving a tough recession. In the hotel market, the company is clearly in a stellar position to continue riding with the strong cycle momentum. For investors seeking a solid stock in the hotel and lodging industry that leads in both luxury and moderately priced accommodations, Starwood should be the brand-name to stay, and stick, with.

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