Is Marriott Stock A Buy After Its Pandemic Recovery? (NASDAQ:MAR)

Investment Thesis

Marriott (NASDAQ:MAR) is on the path to finishing its pandemic recovery. The company is showing strength in its luxury travel and leisure segments. But there are weaknesses in other parts of the business. The broader economic environment is also a major headwind.

The business generates solid free cash flow. Its balance sheet is healthy. But I feel that the company is trading at too high of a valuation. I would wait for a larger margin of safety before buying.

Completing The Pandemic Recovery

Over the last few months, Marriott’s top line has completed its return to 2019 levels. The company reported flat revenue between the last quarter and 2019. Management says that next year’s results won’t have to be compared to prepandemic levels.

Last quarter’s revenue per available room in North America increased over 2019 levels. This is the metric that the company believes is the most meaningful to their business. Worldwide, revenue per available room is still down from 2019. This is due to poor results from the APAC region. In this region, RevPAR is down significantly from 2019. This is driven by continuing travel restrictions in the region. These results should improve as countries like Japan ease pandemic restrictions.

But I think that it’s worth looking at the business’s results in greater detail. Marriott’s recovery has been uneven between its segments. A lot of this recovery has been driven by leisure travel. Management discussed this split at a recent investor conference.

Classically big picture pre-COVID, we were roughly 60% business, 40% leisure. Then you saw during COVID really kind of had quite a flip where you went to almost 47%-53% of leisure being bigger. Now we’re back to more like 53% business, 47% leisure that was Q2. But remember, that’s got group in it, right, as a component of business. So let’s first talk about group, because I think one of the things I do think could be helpful as we move into, again, what may be a period of softness related to a recession, I want to make sure it’s clear. I’m not saying for sure we know exactly when or if this recession may happen, and how deep it’ll be. But certainly to the extent that there is one, you can imagine that the Fed keeps going at this that at some point, it has a real impact on the economy.

Management believes that a further recovery in the business segment could be a tailwind in an economic pullback. Corporate travel is still significantly off from 2019 levels. Bookings in the segment have stayed around a negative 25% rate since early April. But Bank of America (BAC) is reporting that booking volume has picked up in recent weeks. Management also noted that 2023 renegotiations of corporate travel packages will increase prices. These hikes could boost corporate travel revenue by high single digits year over year.

I’m hesitant to invest in a business that depends on leisure travel, especially in the current environment. But I think that Marriott has some extra advantages in this area. The company is the strongest in its luxury travel segment, which is reporting RevPAR up by 37% over 2019. Spending from this segment of the market is likely to be more resilient in an economic pullback. The company’s luxury properties have amenities that set them apart from competitors like Airbnb (ABNB) and Vrbo (EXPE).

But there are still some risks. The company’s top line metrics have failed to show growth over inflation. In real terms, the company’s North American RevPAR is still down by 6.5%. It’s unclear how much pricing power the company has as nonessential spending declines. I think that there are both headwinds and tailwinds to the company’s near-term growth.

What Are The Future Growth Drivers?

I think that Marriott has been very efficient when compared to other hotel chains. Even though revenue was flat, the company grew its TTM bottom line by 30% since 2019. This was driven by a variety of cuts to operating expenses. These measures can continue to boost profitability in the long term. I think that this could continue to expand the company’s earnings growth.

Marriott is also expanding its digital presence. Online bookings hit an all-time high during the last quarter. The company’s Bonvoy loyalty program boasts 169 million members. The program’s credit card offering is also reporting significant growth. Management discussed these online channels in their last earnings call.

Monthly active users of our app, digital visits and direct digital bookings, which help drive the owner and franchisee profitability, all reached new highs in June. Additionally, more members are earning and using points outside of a hotel stay as a result of our focus on enhancing the platform through numerous collaborations. The number of Bonvoy co-brand credit card holders is climbing globally, with card acquisitions and total card spend both hitting record levels in the second quarter. Remarkably, the number of global card accounts rose 16% from the end of 2019 through the end of the second quarter this year.

I think that the company’s direct sales channels could be a competitive advantage in the future. These strong loyalty program numbers should drive incremental market share growth. Marriott owns many strong brands. It’s good that management is trying to find ways to make use of this moat.

Good Returns But Richly Valued

Marriott is trading at a forward P/E of 21 times and a forward EV/EBITDA of 14 times. The company is finished with its previous period of high double-digit comparables. The company’s enterprise value has returned to prepandemic levels. This strikes me as an expensive valuation compared to other companies with similar earnings profiles. I recognize that this valuation is in line with the rest of the industry. A lot of travel stocks have retained higher forward multiples even as the economy pulls back.

The company has a healthy net debt profile. The company returned to its target leverage ratio of 3 to 3.5 times adjusted EBITDA. Most of the business’s debt is very low interest with maturities beyond 2025. This means that the company’s balance sheet isn’t as vulnerable to the current rate hikes.

Because of its healthy debt profile, the company has restarted share repurchases. I’m paying attention to these buybacks since this has been the primary way the business returns cash to shareholders. Between 2016 and the start of the pandemic, Marriott bought back 15% of its shares outstanding. It also continues to pay out a very small dividend as well. The company generates solid operating cash flow. It is doing a good job of reinvesting and returning cash to shareholders. Even during the difficult environment of the last twelve months, the business still generated a 14.1% ROIC.

Final Verdict

Marriott’s outlook is unclear. Tailwinds in business travel and luxury travel segments are offset by headwinds in the broader economy. I think that there’s potential for solid returns here. But I’m still concerned about risks to top-line growth.

Marriott is a solid business, and I like its fundamentals. But I want a larger margin of safety before I buy shares at the current valuation. For these reasons, I’m avoiding the stock right now.