HOT Spin-Off Turns Morgan Stanley On

Morgan Stanley released a research note on February 12, updating its views on Starwood Hotels & Resorts Worldwide Inc (NYSE: HOT).

Morgan Stanley reiterated its HOT Outperform rating and $87 PT (base case), which would represent a 16 percent 2015E return from $76.26 closing price on February 11.

Risk-Reward Snapshot - Starwood

Related Link: Starwood Is Surging Because Of This Spin-Off

• MS bull case: PT of $120 assumes 15.4x 2016E EBITDA ($1.410 billion) - "Improving Global Economy drives strong RevPAR beat, unit growth re-accelerates."
• MS base case: PT of $87 assumes 13.4x 2016E EBITDA ($1.245 billion) - "Strong Industry Fundamentals, though Some Weakness Int'l."
• MS bear case: PT of $65 assumes 11.6x 2016E EBITDA ($1.113 billion) - "Stuttering Economies Drive Below Range RevPAR Growth, Unit Growth Slows Further."

Fundamentals

• Starwood 5 to 7 percent CC 2015 RevPAR guidance is now in line with peers Marriott International, Inc. (NYSE: MAR) and Hilton Worldwide Holdings, Inc. (NYSE: HLT).
• Starwood's group business had strongest booking month ever in December 2014.
• MS expects that operating leverage from Starwood's owned segment leads EBITDA estimate to high-end of guidance. 
• Notably, Starwood has beaten the high-end of quarterly EBITDA guidance for nine quarters in a row.

Value Creation

MS noted in the past Starwood has been inconsistent with buybacks ($0 Q1 2014) and asset sales ($0 Q3 2014); without guidance.

Now Starwood provided guidance and is executing on both:

• Starwood has already repurchased $75 million of stock, ($300 - $350 million annual guidance).
• Starwood gave guidance of ~$800 million of asset sales, (several hotels are already on the market).
• Spin-off of timeshare business and sale of hotels should "drive the market to properly value these segments."

Risks

• Macro-economic challenges do not improve, leading to softer global demand.
• Foreign exchange (FX) headwinds (Starwood has 50 percent international exposure vs. Marriott/Hilton ~20 percent).
• Cost pressures - (healthcare, insurance and property taxes) limit margin increases/incentive fee gains.
• Recent underperformance of "luxury/upper upscale U.S. hotels."

Dividends

Starwood's annual dividend is currently $1.50 per share.

The MS 16 percent base case gain assumes 14.1 percent price appreciation in shares, plus the dividend.

Image credit: Russavia, Wikimedia