Marriott International (MAR)

by | Oct 8, 2020 | Companies, Episodes | 0 comments

The J.W. Marriott in Los Cabos, Mexico.  Image Source: Marriott

Marriott Began With A Root Beer Stand

 

  • Founded by John Willard Marriott in 1927.  Him, his wife Alice, and a partner started a root beer stand in 1927.  He had noticed that people walking around in the hot summer months would quickly buy up soda from street vendors.  He secured the first franchise rights from the A&W root beer company.
  • His stands in D.C. soon expanded into serving food too, and became a family restaurant called the Hot Shoppe, and in 1928 it became the first restaurant in the eastern U.S. with a drive-in option for ordering.
  • For decades he expanded the restaurant business and, with the advent of WWII, operated in government buildings as a food service manager.
  • In 1937 one of the waitresses at the Hot Shoppe restaurants went to Marriott and told him about a trend of people grabbing fruit, snacks, and coffee to go on planes, as air travel was starting to become more popular.  The next day Marriott was on the phone with Eastern Airlines and proposed serving cold boxed lunches in-flight, which was the invention of in-flight food catering.  Before long they had partnerships with American and many other airlines.
  • Issued stock in 1953 for $10.25 per share and went public.
  • He got into the hotel business in 1957 (after 30 years in business!), and built the Twin Bridges Motor Hotel in Arlington, VA.  Marriott claimed it was the first airport hotel.
  • The company was renamed Marriott International in 1967, and the company quickly expanded beyond hotels, buying the Big Boy and Roy Rogers Restaurant chains. 
  • The first international hotel was opened in 1969 in Acapulco, Mexico. 
  • J. W. Marriott was apparently quite an energetic and hospitably minded person.  He was obsessed with making his business better, everyday.  He was known to randomly show up at his restaurant locations at any time of the day or night, and sample the root beer, check for dust, etc.
  • He also apparently inspired great loyalty among his team by helping them out when they needed it.  For example, he went to go visit his workers when they were out sick.
  • Marriott’s son, J. W. Marriott Jr, was instrumental in the building of the hotel empire that Marriott is now known for, and he became CEO in 1972. 
  • Over time Marriott got into other businesses besides restaurants and hotels.  They got involved with theme parks and opened two up – one in California and one in Illinois.  They have since been sold and are now known as California Great America and Six Flags Great America, respectively.  They even had the opportunity at one point to purchase the Walt Disney Company (!) but the deal never materialized.
  • They attempted to get into a few other restaurant ventures that didn’t work out (sold shortly after purchasing them), but managed to purchase and succeed with Host International in 1982.  
  • They also had a senior living division and purchased the American Resorts Group to form what would become the Marriott Vacation Club.
  • There was a big development in 1993 when Marriott decided to split itself up into two corporations: Marriott International (owned the hotel and vacation businesses) and Host Marriott Corporation.
  • There have been lots of key acquisitions over the past decade: Gaylord Hotels in 2012, Protea Hotels (Africa) in 2014, Delta Hotels in 2015 (Canada) and Starwood Hotels in 2016.
  • Starwood was a big acquisition.  It was purchased for $13 billion, mostly from 134 million shares being issued as well as $4.4 billion in new debt issuances.  For every Starwood share that you owned, you would have received 0.92 shares of Marriott stock as well as a one-time $2 cash payout. [my numbers were a bit off in the podcast episode]

Business Overview

  • It is one of the largest hotel chains in the world with over 7,000 properties
  • If you purchased 100 shares for a $1,025 investment in 1953, you would have compounded at over 15.4% annually over the following 60 years.  Few companies can boast that high of a return over that long of a period of time.  We’ll talk about what that return would extrapolate out to today in a few moments.
  • This is still a family run business.  J. W. Marriott Jr. is still involved in the company with a role as Executive Chairman, even though he is older now and no longer CEO.  But the company that bears his name still seems to have an aura of self-improvement about it – he named his biography “Success is Never Final.”
  • Marriott uses a franchise model.  They don’t actually own the real estate their hotels are located in, but they collect management fees associated with the hotels.  99% of hotels are managed or franchised.
  • When Marriott franchises a property, they collect an upfront application fee, and then continuing royalties that are 4-7% of room revenue, depending on the situation.  They also get 2-3% of the food and beverage revenues for some of their brands.
  • They also get licensing fees for the intellectual property they lend to Marriott Vacations Worldwide.  They also license their IP for various residential projects.
  • Marriott’s loyalty program, Bonvoy, reaches across 30 different brands, so there are a variety of hotel experiences available to guests.  This makes sense as a hospitality brand scales, simply because not everyone wants to stay at one type of hotel.  With over 7,000 properties, diversity among brands, but consistency within each brand is very important.
  • There are three tiers of hotels: Luxury, Premium, and Select.
  • 2/3rds of their properties are in North America, with 16% in the Asia/Pacific region and the remaining 17% spread throughout the rest of the world.

Financials

 

2012 2019 CAGR (%) / Comments
Sales 11.8 21 8.5%
Net Income 571 MM 1.2 11% 
Earnings Per Share $1.72 $3.80 12%
Cash 88 MM 225 MM
Long Term Debt 2.5 10
Operating Cash Flow 989 MM 1.7 8%
Investing Cash Flow (585 MM) (284 MM)
Financing Cash Flow (418 MM) (1.5) An increasing amount of share buybacks and dividends have been paid out.  This has partially been fueled by an increasing debt load.
Dividends $0.49 $1.85 20%
Shares Outstanding 311 MM 324 MM A little bit of share dilution – management seems to like to issue a small amount of equity from time to time, but as of late they have been buying back $2 or $3 billion in stock every year.
Total Fees 1.4 3.8 15% growth over the last seven years.  Other than the 2007-2009 time period, fees earned by the company have risen every year for 17 years (2003).

 

Valuation and Closing Thoughts

 

  • Marriott is a great example of how shareholders can receive a lot of value through a series of spin-offs.  According to the company’s website, if $1,025 had been used to purchase 100 shares in the 1953 IPO, nearly 60 years later at the end of 2012 you would have compounded your money at 15.4% annually.
  • I like Marriott’s focus.  They state in their most recent annual report: “We remain focused on doing the things that we do well; that is, selling rooms, taking care of our guests, and making sure we control costs both at company-operated properties and at the corporate level”.  They know that their existence depends on their guests having great experiences.
  • Right now Marriott has almost 1.4 million rooms, with over 515,000 in the development pipeline.  That means long term they are trying to increase their overall capacity by at least 36%.  44% of those properties are outside of North America and 18% are from conversions of competitor’s brands properties.
  • The dividend growth with Marriott has been great this past decade – shareholders have received a lot of cash.
  • At $90 per share right as I record this in August 2020, it looks like it is somewhat fairly valued.  It came down from a high of $153/share at the end of 2019.
  • Once things return to normal (which I believe will eventually happen – nobody knows when), this is a company that routinely earns lots of money and continues to pay it out to shareholders.  In 2019 it earned $3.80 per share which is a P/E of 23.  This is not cheap, but I consider it on the high end of fairly valued because of the quality of earnings.
  • Also consider that revenue looks like it has stagnated for the past three years – but this is due to conforming to new accounting standards.  The total fees earned from franchise fees, the base management fee, and other fees, has increased substantially over the past several years.  In fact it has doubled over the past six years.
  • Yes, the debt has gotten higher, but the cash flows of this business are excellent for a business this large.
  • I’ll keep an eye on it.

Want to listen to another episode or check out another company?  Check out the full archive here.

Alex Mason

Hi, I'm Alex and I'm an individual investor and podcaster who's curious about the world, especially when it comes to long term investing in the stock market. I'm always looking for better ways to analyze businesses and add more mental models to my brain's tool belt.

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