Company Selected
The company selected for the baseline analysis is Marriott International, Inc. (Marriott) ticker symbol MAR which operates in the tourism sector on a global basis. Marriott began operations in 1927 and has operated numerous businesses in the service sector including Cruise Lines, Airline Catering, Theme Parks, Restaurants and of course Hotels. Over the past thirty years Marriott has moved to focus solely on the hotel sector. Marriott operates a managed and franchised asset-light strategy that ensures that the company is not exposed the capital risks associated with owning its own properties. The asset-light strategy that Marriott embraces was an industry first that was led by them in the early nineties and is now emulated by other global hotel companies (Marriott, 2015, p. ii). The strategy was created out of necessity when Marriott had over-exposed their balance sheet with leveraged debt to finance hotel expansion plans and the commercial real estate market collapsed (Sohn, Tang, & Jang, 2013, p. 270). In 1993, Marriott spun off the hotel ownership side of the company to create Host Hotels & Resorts (HOST). This allowed Marriott to move the hotel assets and high debt to a new and separate entity.
Although Marriott records all the revenues at its affiliated properties it attains most of its income from management and franchise fees as shown in table 1.1. As of December 31, 2015, Marriott operated 1,165 hotels and franchised 3,259 hotel properties for a total of 4,424 hotel properties representing 759,330 rooms worldwide. Over the past thirty years Marriott has seen its franchise fee revenue grow exponentially compared to fees from managed properties (Marriott, 2015, p. 23). More and more managed properties are switched to franchise properties as long term agreements come up for renewal. This raises both a challenge and an opportunity which will be examined in this paper. Marriott has a portfolio of over 19 brands ranging from select service to luxury (Marriott, 2015, p. 9). Marriott reported strong financial results in 2015 with revenue growth of 5%, adjusted EBITA growth of 13% and return of capital invested of 49% compared to 2014 financial results (Marriott, 2015, p. 1). Towards the end of 2015 Marriott made a bid to acquire Starwood Hotels & Resorts and since the acquisition was not completed until late 2016 there will not be any analysis around the transaction. The financial information used to conduct the analysis is from 2011 to 2015 which allows for the removal of the financial swings of the great recession of 2008/2009 (Mergent-Online, 2016). The focus of this report including the financial appraisal will be a discussion on how Marriott has progressed from a financial perspective since the end of the great recession and how does it compare to three other companies selected for analysis. There will also be a discussion around recommendations based on the findings of the analysis reviewed.
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Table 1.1
Industry
The hospitality sector is classified as a service sector and certain ratios will not be applicable when compared to the manufacturing sector especially around inventory. There is also a ratio used in the industry that is a strong indicator of hotel company performance. While not directly linked to financial stability and reducing the risk of bankruptcy it is an indicator worth noting and investigating. The ratio is Revenue Per Available Room (RevPAR) room revenue x all available rooms. This ratio shows how effectively hotel companies can drive occupancy and rate which can impact both top line revenue and bottom line profitability for hotel companies and hotel owners (Cross, Higbie, & Cross, 2008, p. 66).
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Figure 1.1
Competitive Set
The three companies selected for the benchmarking analysis are as follows: Hilton Worldwide (Hilton) ticker symbol HLT, Wyndham Worldwide (Wyndham) ticker symbol WYN and Hyatt Hotels & Resorts (Hyatt) ticker symbol H. There were several other hotel companies to select from however most were smaller in size and others that were comparable in size were involved in different industries like casinos. Each of the companies are global firms operating in the hotel sector which is a service industry thus some ratio models will not be applicable. Although each company is similar, there are variations in their operating models which will be discuss throughout the paper at the appropriate stage. Hilton with 758,000 rooms is similar in size to Marriott with 759,330 room and offers the greatest comparison. Whereas, Wyndham operates 678,000 rooms and Hyatt operates 159,336 rooms and Hyatt franchises a smaller number of properties (Hilton, 2015, p. 1), (Marriott, 2015, p. 2), (Wyndham, 2015, p. 2), (Hyatt, 2015, p. 4). Hyatt was privately held until late 2009 when there was an Initial Public Offering (IPO). Hilton was also held privately until 2013 when Blackstone raised an IPO for 55% of the company. Wyndham was also part of numerous other companies including the Cendant Corporation until the 2006 when it was spun off. Cendant suffered through a financial crisis when it acquired another company that had fraudulently financial activity. All the financial data used in the report was obtained from Mergent Online and augmented with data from each of the company’s annual reports to help round out the analysis (Mergent-Online, 2016).
Top Line Revenue Trends & Absolute Net Income
Marriott and Hilton have reported similar revenues over the five-year period while Wyndham and Hyatt had lower but comparable revenues as displayed in Figure 1.2. Total revenue growth over the five-year period showed that Wyndham performed the greatest at 30% growth followed by Hilton at 28% then Marriott 18% and finally Hyatt at 17%. Topline revenue can give an indicator of growth however, a more critical indicator of financial well-being can be net income.
As seen in Figure 1.1 both Marriott and Hilton have similar RevPAR growth of 21% while Wyndham lead the group with 29% RevPAR growth. Hyatt had the lowest growth over the five-year period with only 15% growth although it had the highest absolute dollar amount. RevPAR is strong indicator for an individual hotel owner and with strong RevPAR growth there is a correlation to the overall profitability of the asset for the owner. The results of the RevPAR analysis could then help indicate that hotel owners would be more likely to franchise with a hotel company that has a track record of growing RevPAR. This could then lead to increased fees for successful hotel companies. Another factor impacting RevPAR can be currency implications and mix of business based on geographical location, this means that there can be other factors impacting the metric outside of management performance. Of course, RevPAR does not indicate overall financial health of the hotel company and other ratio analysis will need to be completed to understand future risks for both Marriott and the comparable set.
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Figure 1.2
In Figure 1.3 the net income rankings differed from revenue with Hilton showing 455% growth followed by Marriott with 333% and then Wyndham at 47% and finally Hyatt at 12% growth (Mergent-Online, 2016). Marriott did struggle with one year of top line growth in 2012 (it divested its timeshare business) and could have potentially matched Hilton if it had not dropped for one out of the five years. What can we learn from these numbers? Firstly, revenue growth is not strongly linked to the bottom line performance with Marriott showing low revenue growth but high net income growth. Secondly, Wyndham with stellar top line revenue growth was the worst net income growth performer. There could also be onetime events influencing the net income numbers so some caution should be used not to over rely on just revenue and net income. Further ratio analysis will be required to get a better picture of financial health.
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Figure 1.3
Profitability Ratios
When reviewing the profitability ratios in table 1.2 Marriott has the highest return on assets (ROA) at 13%. This ratio indicates the Marriott has deployed its capital in the most efficient manner compared to its competitors. Marriott also led the competitors in the category of return on investment at 129% versus the comparable set at 11%. The only area of concern is the EBITDA margin at 10% versus the higher margin rates for the competitive set. The weakness with this measure is that each company can have a different mix of managed to franchised hotels that could impact this metric. There will need to be further analysis of other ratio metrics to fully evaluate the financial health of Marriott including the comparisons to the competitive set companies. Hilton has reported a low tax rates, this could be caused by the current strategy of selling off hotel assets. There could be substantial tax benefits from those transactions. Although, there could also be numerous other reasons for such a result. Overall, Marriott remains very profitable and in a position of financial strength.
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Table 1.2
Long-Term Solvency
When reviewing Marriott for long-term solvency the company showed strength when evaluated on Debt to Equity versus its peer group and was the best performer in interest coverage. Moody’s rating for Marriott is stable at Baa2 and in comparison, the competitivities set is listed as follows with Hyatt the same rating as Marriott at Baa2 then Hilton at Ba2 and Wyndham with the lowest rating at Baa3 (Moody’s, 2016). Moody’s rating system goes from Aaa, Aa, A, Baa, Ba, B, Caa, or Ca (Moody’s, 2016). Given that Moody’s uses multiple factors to evaluate risk their ratings system is helpful in supporting an overall opinion.
Short-Term Solvency
As can be seen in table 1.3, Marriott’s current and quick ratios tests are shown at well below 1.0. This indicates that there could be issues with Marriott meeting its short-term debt obligations. The other benchmark companies have better ratios and could better cover their short-term obligations. Marriott does have a credit facility of close to $2,000M however, there is a covenant in place of total debt to adjusted EBITDA that cannot be greater than 4:1 (Marriott, 2015, p. 49). For interest coverage Marriott leads the way with Hilton having the lowest coverage of the set. This indicates that Hilton is more at risk over the long-term to meet its interest obligations. Given Hilton’s large debt load it is of grave concern that they move quickly to reduce their overall risk.
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Table 1.3
Altman Z-Score Analysis
In this next section there will be a review of Marriott’s Altman Z-score results over a five year period in figure 1.4 and then a comparison to the other hotel companies and their Altman Z-Score (Altman, 1968). Firstly, Marriott has shown an improved Altman Z-Score from 1.0 in 2011 to 2.11 in 2015. Secondly, Marriott showed consistent improvement each year over the five-year period. Since this paper is evaluating service firms the Altman Z-Score ratio for zoning results is different than that of manufacturing firms. The likelihood of bankruptcy is high for a service company when the Altman Z-Score is lower than 1.1 and financially sound if above 2.6. With Marriott’s move from 1.0 which was within the danger zone into 2.11 over a five-year period shows steady improvement and a move away from the likelihood of bankruptcy.
When reviewing the Altman Z-Score for the competitors there was some interesting findings. Firstly, Hilton is in the danger zone at risk for bankruptcy with a score of -.29 in 2011, the score did not change by much in the following three years and just showed slight improvement in 2015 to a score of 0.14. This is the first time that Hilton has showed a positive Altman Z-Score in five years. Secondly, Hyatt has shown large gyrations in their Altman Z-Score over the five-year period. This could be due to specific one-time write off’s. Wyndham has also slight improvement in their Altman Z-Score but it continues to show risk at 1.18. Overall the analysis shows that Marriott has improved their Altman Z-Score over a period and that they lead all other companies with the least risk of bankruptcy.
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Figure 1.4
It should be noted that the Altman Z-Score analysis can contain certain weaknesses since the formula relies on accurate financial information. If any of the financial results include overstated financial results, then the score will not correctly reflect the risk. There have been some improvements in the analysis since Altman revisited his original findings (Altman, 2000). Another weakness noted in the Altman Z-Score is the accuracy of predicting bankruptcy is reduces from the mid-nineties percentile one year out versus the mid-seventies for five years out from predicting bankruptcy (Altman, 2000, p. 43). This creates a risk when looking to identify companies that may be prone to bankruptcy. Annual monitoring is required as the score can shift quickly and increased risk may go undetected.
Discussion and Conclusion
Marriott ranked the highest over a five-year period on the Altman Z-Score analysis and when compared against the competitive set. Marriott tied for the highest on Moody’s ratings and well ahead of the other two competitors. Marriott has a strong return on assets and capital invested however there was an interesting ratio on short-term solvency that showed some weakness. From the analysis, there is enough evidence to show that Marriott has taken of full advantage to improve its overall financial health since the end of the Great Recession. Marriott also benefited from owning the least about of properties going into and out of the recession (Sohn et al., 2013, p. 271). It was helpful to evaluate the competitors listed for the comparison models. Of the three competitors, it was interesting to see the risk associated with the financial position with Hilton. After further analysis Hilton has significant debt from a leveraged buyout then spin off. This would account for the challenges to its Altman Z-Score however, further investigation would need to be undertaken including internal and external audits to ensure that there is also no financial irregularities undertaken by management (Lokanan, 2014, p. 421). There continues to be significant risk of bankruptcy and I would recommend that Marriott Monitor the situation as it may create an unforeseen opportunity if Hilton was to declare bankruptcy. Marriott could grow its franchise business as potential owners would not want to be affiliated with an organization going through bankruptcy.
Marriott has grown its business through a combination of organic and acquisition growth over the past forty years. Marriott needs to continue to focus on organic as it is one of the cheapest ways to grow the business without paying a premium for additional brands or hotels. There is however an argument that Marriott should also continue to get a strong balance sheet that would allow it to be opportunistic when potential acquisition targets surface. This two-prong approach creates the greatest window of potential growth given the cyclical nature of the tourism business. Marriott will need to be careful to not over leverage themselves when opportunities surface as it could have a significant impact on their Altman Z-Score.
Through the analysis there was also an interesting realization regarding Marriott’s business model. Over the years, the franchise side of their business has grown so significantly that it may require Marriott to analyze if they would want to spin off the manage side of the business so that they could focus on just two sides of the business. Firstly, they could focus on franchising and ensuring that franchisees are growing. Secondly, they could focus on brand development to ensure that the brands they own are delivery full value and attracting new customers and owners. Owners are increasingly looking at third party operators to run their assets at a fraction of the cost compared to those managed by Marriott. Given this declining portion of the business and the fact there is still good value for this side of the business or at least until long term management agreements start to run out. These management contracts would be highly sought after by another third-party operator or it could create an opportunity for a spin off and merger. This spin off would be similar in nature to others they have undertaken like the spinoff of owned hotels in the nineties or the vacation rental business spin off more recently.
Given the fact that most hotel companies covet the management side of the business it would require further detailed analysis to truly understand the net benefits and risks of divesting this side of the business compared to the status quo. If the net gains of a franchise only strategy is as positive as those of the asset-light strategy firms would embraced it (Sohn, (Hugo) Tang, & (Shawn) Jang, 2014, p. 107). Further research is required to confirm if a move away from management contracts would be a net benefit to a global hotel firm. Marriott has experience with being an industry leader when in the past so once the benefits and risks are understood it would be possible that Marriott could be the first major hotel company to lead such a venture into a franchisee fee only environment. Having discovered this insight, I will contemplate using this topic for research and analysis for my major project at the end of the MGM program.
References
Altman, E. I. (1968). Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy. Journal of Finance, 23(4), 589–609. Retrieved from http://www.jstor.org/stable/2978933
Altman, E. I. (2000). Predicting financial distress of companies: Revisiting the Z-Score and ZETA® models. Handbook of Research Methods and Applications in Empirical Finance, 53(July), 428–456. https://doi.org/10.4337/9780857936097.00027
Cross, R. G., Higbie, J. a., & Cross, D. Q. (2008). Revenue management’s renaissance: A rebirth of the art and science of profitable revenue generation. Cornell Hospitality Quarterly, 50(1), 56–81. https://doi.org/10.1177/1938965508328716
Hilton. (2015). 2015 Annual Report. SEC, 23. https://doi.org/10.1017/CBO9781107415324.004
Hyatt. (2015). 2015 Annual Report. SEC, (33), 1–3. https://doi.org/10.2307/1337663
Lokanan, M. (2014). How senior managers perpetuate accounting fraud? Lessons for fraud examiners from an instructional case. Journal of Financial Crime, 21(4), 411–423. https://doi.org/10.1108/JFC-03-2013-0016
Marriott. (2015). 2015 Annual Report. SEC, 23. https://doi.org/10.1017/CBO9781107415324.004
Mergent-Online. (2016). Hotel Comparitive Results. Mergent Online, 3–33. Retrieved from http://www.mergentonline.com
Moody’s. (2016). Rating methodology. Moody’s, 1–31. Retrieved from www.moodys.com
Sohn, J., (Hugo) Tang, C. H., & (Shawn) Jang, S. C. (2014). Asymmetric impacts of the asset-light and fee-oriented strategy: THE business cycle matters! International Journal of Hospitality Management, 40, 100–108. https://doi.org/10.1016/j.ijhm.2014.03.007
Sohn, J., Tang, C. H. H., & Jang, S. C. S. (2013). Does the asset-light and fee-oriented strategy create value? International Journal of Hospitality Management, 32(1), 270–277. https://doi.org/10.1016/j.ijhm.2012.07.004
Wyndham. (2015). 2015 Annual Report. SEC, 20549(33), 1–3. https://doi.org/10.2307/1337663
Tables
Table 1.1
10 Year Financial Overview
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Note: The following table presents a summary of our selected historical financial data derived from our last 10 years of Financial Statements. Because this information is only a summary and does not provide all of the information contained in our Financial Statements, including the related notes, you should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Financial Statements for each year for more detailed information including, among other items, restructuring costs and other charges we incurred in 2008 and 2009, timeshare strategy-impairment charges we incurred in 2009 and 2011, and our 2011 spin-off of our former timeshare operations and timeshare development business. For periods before the 2011 spin-off, we continue to include our former Timeshare segment in our historical financial results as a component of continuing operations because of our significant continuing involvement in MVW’s future operations.
(1) In 2013, we changed to a calendar year-end reporting cycle. All fiscal years presented before 2013 included 52 weeks, except for 2008 which included 53 weeks.
(2) Balances do not reflect the impact of discontinued operations. Also, for periods prior to 2009, we reclassified our provision for loan losses associated with our lodging operations to the “General, administrative, and other” caption of our Income Statements to conform to our presentation for periods beginning in 2009. This reclassification only affected operating income.
(3) We adopted certain provisions of Accounting Standards Certification Topic 978 (previously Statement of Position 04-2, “Accounting for Real Estate Time Sharing Transactions”), in 2006, which we reported in our Income Statements as a cumulative effect of change in accounting principle.
(4) The following businesses became discontinued operations in the year we announced that we would sell or exit them: synthetic fuel (2007).
(5) We issued stock dividends in the third and fourth quarters of 2009, and a stock split in the form of a stock dividend on June 9, 2006. We have adjusted all per share data retroactively to reflect those stock dividends.
(6) Represents fee revenue from the United States (but not Hawaii before 2011) and Canada.
(7) Represents fee revenue outside of North America, as defined in footnote (6) above.
(8) Effective year-end 2014, we adopted ASU No. 2015-03, which changes the presentation of debt issuance costs, and ASU No. 2015-17, which changes the classification of deferred taxes. Prior periods have not been adjusted for these new accounting standards.
Table 1.2
Profitability Ratios Over 5 Years
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Note:
Table 1.3
Solvency Ratios over 5 Years
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Altman Z-Score Tables
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Altman Z-Score Tables
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RevPAR Growth Over A 5 Year Period
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Figure 1.1
Topline Revenue Growth Over 5 Years
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Figure 1.2
Net Income Over 5 Years
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Figure 1.3
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Figure 1.4
Appendix
Altman Z-SCORE
Formula is:
Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 0.999X5
· X1 = Working Capital / Total Assets
· X2 = Retained Earnings / Total Assets
· X3 = EBIT / Total Assets
· X4 = Book Value of Equity / Total Liabilities
· X5 = Sales/ Total Asset
Zones of Discrimination – Service Sector
· Z' > 2.6 ‐“Safe” Zone
· 1.1 < Z' < 2. 6 ‐“Grey” Zone
· Z' < 1.1 ‐“Distress” Zone
Profitability Ratios
Marriott InternationalHilton WorldwideWyndham WorldwideHyatt Hotels & Resorts
ROA % (Net)13.275.426.311.58
ROE % (Net)AvgEqty<026.1555.512.88
ROI % (Operating)128.6910.716.285.68
EBITDA Margin %10.4221.1122.2013.93
Calculated Tax Rate %31.965.4333.1927.13
Revenue per Employee113,616$ 68,732$ 146,844$ 96,178$
Liquidity Ratios
Marriott InternationalHilton WorldwideWyndham WorldwideHyatt Hotels & Resorts
Quick Ratio0.370.650.540.72
Current Ratio0.431.050.961.02
Net Current Assets % TA-30.40.46-0.910.22
Debt Management
Marriott InternationalHilton WorldwideWyndham WorldwideHyatt Hotels & Resorts
LT Debt to EquityEquity<01.725.220.26
Total Debt to EquityEquity<01.765.480.34
Interest Coverage9.783.178.755.77
Asset Management
Marriott InternationalHilton WorldwideWyndham WorldwideHyatt Hotels & Resorts
Total Asset Turnover2.240.430.570.55
Receivables Turnover13.1511.46.3315.13
Inventory Turnover-9.619.05232.9
Accounts Payable Turnover24.1835.7814.2131.94
Accrued Expenses Turnover17.4511.317.0635.77
Property Plant & Equip Turnover11.641.363.821.05
Cash & Equivalents Turnover144.8619.1931.287.58
Altman Z-Score
http://investexcel.netMarriott
PARAMETERS
Income statement
Net sales14,486,000,000$
Operating income1,350,000,000$
Balance sheet
Current assets1,384,000,000$
Total assets6,082,000,000$
Current liabilities3,233,000,000$
Total liabilities9,672,000,000$
Retained earnings4,878,000,000$
Public companies
Market value of equity(3,590,000,000)$
Private companies
Book value of equity-$
CALCUATIONSZZ1Z2
FactorPublicPrivateGeneral
MfgMfgUse
Working capital/Total assetsX1-0.304011.20.7176.56
Retained earning /Total assetsX20.8020391.40.8473.26
EBIT/Total assetsX30.2219663.33.1076.72
Market value of equity/Total liabilitiesX4-0.371170.6
Book value of equity/Total liabilitiesX4A00.421.05
Net sales/Total assetsX52.38178210.998
Z-Score3.653.532.11
Altman Z-Score
http://investexcel.netHilton
PARAMETERS
Income statement
Net sales11,272,000,000$
Operating income2,071,000,000$
Balance sheet
Current assets2,585,000,000$
Total assets25,716,000,000$
Current liabilities2,467,000,000$
Total liabilities19,765,000,000$
Retained earnings(3,392,000,000)$
Public companies
Market value of equity5,951,000,000$
Private companies
Book value of equity-$
CALCUATIONSZZ1Z2
FactorPublicPrivateGeneral
MfgMfgUse
Working capital/Total assetsX10.0045891.20.7176.56
Retained earning /Total assetsX2-0.13191.40.8473.26
EBIT/Total assetsX30.0805343.33.1076.72
Market value of equity/Total liabilitiesX40.3010880.6
Book value of equity/Total liabilitiesX4A00.421.05
Net sales/Total assetsX50.43832610.998
Z-Score0.710.580.14
Altman Z-Score
http://investexcel.netWyndham
PARAMETERS
Income statement
Net sales5,536,000,000$
Operating income1,015,000,000$
Balance sheet
Current assets1,869,000,000$
Total assets9,716,000,000$
Current liabilities1,957,000,000$
Total liabilities8,763,000,000$
Retained earnings1,592,000,000$
Public companies
Market value of equity953,000,000$
Private companies
Book value of equity-$
CALCUATIONSZZ1Z2
FactorPublicPrivateGeneral
MfgMfgUse
Working capital/Total assetsX1-0.009061.20.7176.56
Retained earning /Total assetsX20.1638531.40.8473.26
EBIT/Total assetsX30.1044673.33.1076.72
Market value of equity/Total liabilitiesX40.1087530.6
Book value of equity/Total liabilitiesX4A00.421.05
Net sales/Total assetsX50.56978210.998
Z-Score1.201.031.18
Altman Z-Score
http://investexcel.netHyatt
PARAMETERS
Income statement
Net sales4,328,000,000$
Operating income582,000,000$
Balance sheet
Current assets1,124,000,000$
Total assets7,596,000,000$
Current liabilities1,107,000,000$
Total liabilities3,601,000,000$
Retained earnings2,289,000,000$
Public companies
Market value of equity3,995,000,000$
Private companies
Book value of equity-$
CALCUATIONSZZ1Z2
FactorPublicPrivateGeneral
MfgMfgUse
Working capital/Total assetsX10.0022381.20.7176.56
Retained earning /Total assetsX20.3013431.40.8473.26
EBIT/Total assetsX30.0766193.33.1076.72
Market value of equity/Total liabilitiesX41.1094140.6
Book value of equity/Total liabilitiesX4A00.421.05
Net sales/Total assetsX50.56977410.998
Z-Score1.911.061.51
petersharp
Assignment_Sample_4.docx
