A Cautious View of Marriott
We continue to rate the shares of Marriott International (MAR) a Hold following the release of Q1 financial results. Although we find Marriott's current valuation significantly more intriguing following the pullback of approximately 30% from the highs reached in the spring of 2007, we do not anticipate significant share price appreciation in the near term.
Given the current uncertainty regarding the state of the economy and its potential impact on Marriott's lodging and timeshare businesses, we prefer to remain cautious on the shares at this time. Our $34.00 six-month target price equates to a multiple of approximately 15x our 2009 earnings estimate.
We believe that the shares of Marriott are appropriately valued, relative to other large-cap lodging companies and given the lodging environment. Marriott currently trades at 16.7x and 14.8x our 2008 and 2009 earnings estimates, respectively, and at a slight discount to Starwood Hotels (HOT), which currently trades at 15.7x our 2009 EPS estimate.
Not Quite Bowled Over by Kellogg
Kellogg Company (K), the leader in ready-to-eat cereals, has successfully executed the Volume to Value and Manage for Cash strategies. In 2006, management adopted additional programs, namely, Sustainable Growth and People Passion and Pride . By focusing on brand building and profitability, Kellogg is reporting consistent sales and earnings growth, reducing debt, and repurchasing shares.
However, the recent commodity inflation is pressuring margins and the trend is expected to continue at least through the first half of 2008. The stock is rated a Hold.
During the last five years, a period of relatively stable and modest earnings growth, Kellogg's stock has traded in a narrow P/E range of 16.6 to 21.7. The stock is currently trading at a P/E multiple of 19.9. Given that cash flow has been increasing consistently and EPS have exhibited modest growth, the stock is expected to trade at the top-end of the historical valuation range. Hence, the target price is $55.75 based on a 21 P/E multiple on trailing 12-month earnings.
ConocoPhillips Target: $100
Our continued positive outlook for ConocoPhillips' (COP) shares reflects the company's strong position in the politically stable OECD markets and attractive valuation. The company has significantly strengthened its upstream portfolio through its Burlington and LUKOIL transactions and remains a premier domestic refining player.
The recent alliance with EnCana (ECA) further cements its upstream and downstream prospects. We have raised our earnings estimates ahead of the company's first-quarter 2008 results to reflect strong commodity prices. Our new 2008 and 2009 EPS estimates are $11.10 and $11.45, up from $10.39 and $10.97 before, respectively.
Despite its large size, ConocoPhillips is still not part of the group generally referred to as the super majors, which includes the global oil giants, such as Exxon Mobil (XOM), BP (BP), Total (TOT), Royal Dutch/Shell (RDS-B), and Chevron (CVX).
