Guidance Lowered for Marriott
We continue to rate the shares of Marriott International (MAR) a Hold following the release of second-quarter results. The operating environment in the lodging sector has changed substantially in recent quarters. Additionally, the company's timeshare segment is experiencing weakness, with sales down considerably.
We note that the company lowered its 2008 EPS guidance, from a range of $1.98 to $2.08 to a range of $1.77 to $1.88. The management expects to report worldwide comparable 2008 RevPAR growth between 0% and 2%. Marriott's low-end properties have experienced the greatest level of operating challenges to this point of the current downturn.
We continue to prefer lodging companies with greater exposure to the high-end market, as group business remains relatively steady and consumers have yet to trade down to lower-cost chains. On the positive side, the lodging industry has shown a willingness to maintain average daily rates to this point in the downturn.
Given our forecast for only moderate earnings growth in 2009, along with the ongoing 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.
We believe that the shares are appropriately valued, relative to other large-cap lodging companies and given the lodging environment. Marriott International currently trades at 13.2x and 11.6x our 2008 and 2009 earnings estimates, respectively. Our $22.75 six-month target price equates to an EPS multiple of approximately 12.5x our 2008 estimate, and roughly 8x our 2008 EBITDA estimate.
For Freddie, No Good Way Out
The shares of Freddie Mac (FRE) have declined sharply this week based on reports about a possible Government takeover of the Government Sponsored Enterprises (GSEs) to prevent a collapse. There are increasing concerns that these companies do not have enough capital to withstand losses on their portfolio.
While we continue to believe that both the GSEs are too big and important to fail, we anticipate higher losses and write-offs in the coming quarters as the housing situation continues to worsen. FRE will need to raise more capital in the near term, which is becoming increasingly difficult and expensive and will result in further dilution to the existing shareholders. Thus, we are downgrading our recommendation to Sell.
Valuation remains a messy exercise in the absence of good financial information for both FRE and Fannie Mae (FNM) (its closest peer). Our ultimate goal is to value FRE based on a core version of operating earnings (avoiding the numerous mark-to-market adjustments for hedge instruments that fail to qualify for hedge accounting treatment), but as yet we have none to use.
