Pick Marriott For 40% Gain

by Trefis Team
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Marriott’s stock (NASDAQ: MAR) has declined by 36% since the beginning of the year. The travel and tourism industry has come to a grinding halt, and Marriott is no exception. The current recessionary environment has affected the company’s ability to generate revenues, cash flows, and pay dividends. As the recession is likely to persist through late Q4 2020, Marriott’s revenues are expected to decline by 50% from $21 billion in 2019 to $10 billion in 2020. The company has taken a string of measures to preserve its cash reserves by slashing capital expenditures, suspending dividends, and trimming administrative expenses. While the cash reserves will deteriorate, the company’s strong liquidity position can support operating losses for more than a year. Thus, we believe that the stock can achieve pre-Covid levels with the advancement in vaccine trials and a gradual uptick in travel demand.

Trefis analyzes the Impact Of The Covid-19 Recession On Marriott in an interactive dashboard with a focus on Marriott’s liquidity reserves and concludes that a Covid-19 recession could wipe off more than $1.7 billion of Marriott’s cash reserves in FY2020.

Impact On Marriott’s Revenues 

  • With the CDC’s acknowledgement of SARS-COVID-2 being airborne in enclosed spaces, the sluggishness in air travel is likely to remain until the discovery of a successful vaccine or an effective treatment. As a result, Marriott’s revenues could decline by about 50% in FY’20, on account of weak demand as observed during the second quarter.
  • Marriott has 1.38 million of room inventory across North America, Europe, Middle East & Africa, Asia Pacific, and Latin America. The company’s America segment contributes 65% of the total revenues and commands a 66% share of the total room inventory.
  • In Q2, the occupancy rate at the company’s North America, Europe, Middle East & Africa, Asia Pacific, and Latin America regions dropped to 20%, 2.8%, 17.8%, 25.5%, and 5.7%, respectively. With the coronavirus pandemic growing across countries, as highlighted in our dashboard Trends In U.S. Covid-19 Cases, we expect the low occupancy rates to remain even in Q4.

Impact On Marriott’s Cash Flows

  • The steep fall in revenues and profitability are expected to widen Marriott’s operating losses in FY2020.
  • The company is offering discounts and has lowered its average daily rate in America by 30% to enhance customer inflow.
  • However, high general & administrative expenses coupled with added interest burden are hurting the company’s bottom line.
  • That said, Marriott has taken a number of measures to mitigate the impact on its cash balance by suspending dividends and cutting down capex.
  • Thus, we estimate that Free cash flow from operations (FCFO) will go down from $1.7 billion in 2019 to -$1.3 billion in 2020. Also, with $300 million of capital expenditures, FCFO-CapEx will be -$1.7 billion in 2020.

Cash Balance Impact

  • This will lead to a 2020 cash balance of $0.7 billion, nearly burning all the cash raised during the second quarter.
  • However, the company has $2.9 billion of undrawn credit facility which can support operating losses for another year.
  • Considering Marriott’s pre-Covid market capitalization of $50 billion and FY2020 cash outflow of $1.7 billion, the stock looks considerably undervalued as the company’s net-debt will shoot up by at most $2 billion this year.

Conclusion

To sum things up, Marriott can weather a recession easily through FY2020 by cutting Capex, eliminating share repurchases, suspending dividends, and its $4.4 billion of available liquidity.

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