The decision to invest in a firm requires rigorous analysis of the financial performance and other aspects of the business such as corporate governance and operational risks. Through the financial analysis, the investors seek to find out the historical trend in the financial performance and future prospects. In order to analyze the historical trend in the financial performance, the ratio analysis is applied as the most appropriate tool (Kobyletskii and Sakevych, 2015).
The ratio analysis provides coverage to the assessment of four important aspect of business such as profitability, liquidity, efficiency, and solvency. Further, the ratio analysis makes it easy to compare the firm’s financial performance with the industry or the competitors. The comparison of the firm with industry or competitor is essential to find out firm’s standing in the market.
Further, the corporate governance also has great impact on the long term investment decisions. The evaluation of corporate governance pertains to measurement of the adequacy of control environment and governance mechanism of the firm. It is also helpful in analyzing the operational risks of the business (Coyle, 2004).
In this context, a report has been prepared here that analyzes the scope of investment in Marriott International Inc, which is a hospitality sector company. This report covers analysis of financial performance of Marriott Internal Inc followed by analysis of capital structure, dividend policy, and risks and corporate governance. Further, the report covers valuation of the common stock of the company and its comparison with the actual price prevailing in the market. Based on the overall analysis, the report concludes with a recommendation on investment in the common stock of the company.
Overview of Marriott International Inc
Marriot International Inc, listed on Nasdaq, is a United States based firm, having headquarters in Bethesda, United States. The company is engaged in the hospitality business providing services of accommodation through franchise and licensed properties all over the world. The company was founded in the year 1971 and since then it has grown manifold which is depicted from the fact that now it owns more than 6000 properties and operates in 122 countries (Marriott, 2017). The company operates through three primary segments such as North American full service, North American limited services and international. The major brands of Marriott are Bulgari, Ritz Carlton, Edition, and Courtyard.
The company’s growth is laid by innovations. The company follows never ending process of improvement in the customer service and its internal business process that provides an opportunity to the company grow more rapidly than its competitors. Marriott International started its business with a small A&W root bear stand in the year 1927 and gradually it grew big over the period of time. Now, the company has a market cap of $35.47 billion and it has reported revenues of $17 billion for the year ended December 2016 (Yahoo finance, 2017). Recently, Marriott has acquired the business of Starwood Hotels in a bid that completed in September 2016. After the acquisition of Starwood, Marriott has become the world’s biggest hotel chain that provides large portfolio of services to the rarest parts of the world (Marriott, 2017).
Evaluation of Financial Performance
In order to make investment decision, it is important to analyze the financial performance of a company. The ratio analysis has been performed to analyze the financial performance of Marriott International Inc which covers analysis of profitability, liquidity, efficiency, and solvency of the company (Tracy, 2012). The analysis covers trend in ratios over the period of 3 years such as 2016, 2015, and 2014, in which 2016 being the current year and 2015 and 2014 being the previous years. Further, the ratios have also been compared to the industry average to assess the company standing in the market. However, before carrying out the ratio analysis, the financial performance at a glance is depicted below:
From the charts presented above, it could be observed that net profit of the company were low in 2014, then increased in 2015 sharply, but again fall down in 2016. However, the revenues of the company are showing increasing trend over the period of three years. The rise in revenues in 2016 is the impact of acquisition of Starwood. Further, primary reason for decrease in profits in 2016 is also the acquisition of Starwood because it caused increase in the cost of operations which lowered the profitability (Marriott, 2017). In respect of net worth, it has been observed that the company had negative net worth in the year 2014 and 2015. However, post acquisition of Starwood, the net worth turned positive.
Profitability
The evaluation of profitability is the most essential aspect of investment decision. The primary ratios such as net margin, gross margin, and return on equity have been computed to evaluate the profitability of the company (Tracy, 2012).
It could be observed that net margin of the company was 5.46% in 2014 which increased to 5.93% in 2015. The increase in net margin show that the company’s profitability improved in the year 2015 as compared to 2014. Further, the gross margin also increased in the year 2015 to 14.66% from 14.25% in 2014. The increase in gross margin depicts that the company saved cost of revenues. Further, the savings in cost of revenues also affected the net margin positively in the year 2015. However, it could further be observed that in 2016, the net margin went down to 4.57% despite increase in the gross margin to 15.38%. This indicates that company saved cost of revenues in 2016 also but the increase in operating expenses caused reduction in the net margin ratio.
The equity of the company was negative in the years 2014 and 2015 due to which the return on equity has been negative in these years. However, as the return on equity reached to 14.56% in 2016 as the equity turned positive, consequent upon acquisition of Starwood. Comparing the position of the company, it was found that net margin and gross margin are lower than the industry average of 24.12% (net margin) and 66.18% (gross margin) (appendix-A).
Liquidity
After analyzing the profitability, it comes on analyzing the liquidity which concerns to company’s ability to meet out the short term debt obligations (Tracy, 2012). In order to assess liquidity of Marriott, the following ratios have been computed and analyzed.
It current ratio could be observed to be improving over the period of three years. In the year 2014, the current ratio was 0.53 times which decreased to 0.43 times in 2015; however, it again increased to 0.65 times in 2016. The increment in the current ratio is has been found to be due to increase in the current assets in the year 2016. The acquisition of Starwood had a great impact on the positive movement in the current ratio also. The company does not report inventories; therefore, the implications of quick ratio are not relevant for analysis. Comparing the position with the industry, it could be observed that the current ratio of the company (0.65) is slightly lower than the industry average (0.69). The low current ratio depicts lower liquidity of the company as compared to industry average.
Efficiency
The evaluation of efficiency is essential to find out that whether the management has utilized the assets of the company profitably not. In this regards, the primary ratios such as receivables collection period, payables collection period, and asset turnover have been computed (Tracy, 2012).
The receivables collection period of the company was 29 days in the year 2014 which reduced to 28 days in 2015. The reduction in the receivables days positively affects the management efficiency. However, in the year 2016, the receivable collection period increased to 36 days. Further, the payable period increased from 63 days in 2014 to 75 days in 2016 which depicts improvement in the management’s efficiency. The increase in the payable days shows that the suppliers of the company are offering extension in credit period. Further, the asset turnover ratio was observed to be falling down from 2.02 times in the year 2014 to 0.71 times in the year 2016. The decrease in the asset turnover ratio is indicative of reduction in the management’s efficiency.
The industry average receivables collection period is 76 days which is higher than the company’s receivables collection period of 36 days. Further, the industry average payables collection is 57 days which is lower than the payable collection period of company of 75 days. In both the cases, the company is in better position as compared to the industry. Further, the asset turnover ratio of the company (0.71) is also better than the industry average of 0.51 times. Overall, it could be articulated that the company’s management is more efficient than the industry average.
Solvency
The assessment of solvency is concerned with the measurement of company’s ability to meet out its long term debt obligations (Tracy, 2012). The primary ratios such as debt equity and debt to total asset have been computed for this purpose.
The debt equity ratio indicates debt used by the company in financing its assets relative to equity. In the case of Marriott, the equity was negative in the year 2014 and 2015 which means that the assets of the company were financed solely by debt in these years. However, in the year 2016, the company acquired Starwood, which turned the equity of the company positive and the debt equity reached to 3.51 times. It seems that the acquisition of Starwood has really been a booster for the company. Further, the debt to asset ratio was very high in 2015 and 2014 at 1.59 times and 1.32 times respectively. It decreased in 2016 to 0.78 times depicting improvement in the solvency position of the company. Further, the debt equity ratio of the company has gone lower than the industry average.
Investment
The investment ratios such as dividend yield, earning per share, and interest coverage ratio have been computed as shown in the table presented below (Tracy, 2012)
The dividend yield is showing increasing trend over the period of three years. In the year 2014, the dividend yield was 1.03% which increased to 1.42% in 2015. The increase in dividend shows higher return for the investors. The EPS of the company also increased from $2.60 in 2014 to $2.68 in 2016. The EPS of the company has also been observed to be higher than the industry average of $1.94. However, the interest coverage ratio fell down from 10.08 times in 2014 to 5.85 times in 2016. The decrease in the interest coverage could be due to sharp increase in the debt levels. Further, the interest coverage ratio of the company was also found to be lower than the industry average of 9.10 times.
Optimality of Capital Structure
The optimal capital structure implies the mix of debt and equity which maximizes the value of company by reducing the cost of capital. It is very important for a firm to maintain adequate balance between the debt and equity components to achieve sustainable growth (Tarek al-Kayed, 2012). In respect of Marriott International Inc, the capital structure is presented as below:
|
Capital structure of Marriott |
||
|
2016 ($M) |
2015 ($M) |
|
|
Equity |
5,357.00 |
(3,590.00) |
|
Long-term debt |
8,197.00 |
3,807.00 |
In the year 2015, the company had negative equity which clearly indicates a crisis situation. Negative equity and long term debt of $3,807 million indicates that the company was facing solvency risk at the high level. However, the capital structure of the capital strengthened in the year 2016 after the acquisition of Starwood. Presently, the company has $1.53 long term debt for $1 of equity, which appears to be adequate.
Dividend Policy
The company takes dividend decisions as per the dividend policy framed and approved by the management. The dividend decisions are crucial and considered significant for the achievement of the goal of enhancement in the shareholders worth. In respect of Marriott International Inc, it has been observed that the company is paying attractive dividend to the shareholders. However, the company is not following constant dividend payout, the dividend paid is adjusted as per the earnings of the year (Baker, 2009). The position of past three years is depicted as below:
|
2016 |
2015 |
2014 |
|
|
Dividend payout |
43% |
30% |
30% |
|
Dividend yield |
1.39% |
1.42% |
1.03% |
It could be observed that in the year 2014 the company paid out 30% of the earnings and it followed the same in the year 2015. In the year 2016, the company paid 43% of the earnings to the shareholders. Further, the dividend yield also increased substantially over the period from 1.03% to 1.39%. Looking at the growth in dividend yield and the payout ratio, the dividend policy of the company seems to be attractive to the shareholders.
Risk Profile and Corporate Governance
The analysis of financial performance and position of the company depicts that the financial risk has reduced after the acquisition of Starwood. The acquisition of Starwood has boosted the financial position of the company (Marriott, 2017). However, the analysis of financial risk is not sufficient to take such a vital decision to invest in the company. The other aspects such as operational risk and corporate governance are also essential for this purpose (Vinella and Jin, 2006). The analysis of corporate governance is particularly important for investment from the longer term view point. In respect of Marriot international Inc, it has been observed that the business of the company is subject to many operational risks.
The business of the company runs on the basis of franchise system in respect of which premature termination of the contracts is the crucial risk. The premature termination of the franchise agreements would affect the financial performance of the company adversely. Further, the company operates at the global level which exposes it to the political and economic risks. The unfavorable changes in the political and governance system of a country or the economic condition may affect the financial performance of the company. In the year 2016, the company operated in 122 countries. Further, operating in different countries also exposes the revenues of the company to the risk of foreign exchange (Marriott, 2017).
Further, the company recognizes the risk of violation of legal compliances due to its spread out operations in many countries. The violation of the legal aspects could lead to increased cost which would affect the profitability adversely. Apart from this, it has been observed that Marriott gives guarantee to the franchises to provide funds in case franchises are not able to achieve the specified target of operating profits. This arrangement may put the company under huge financial burden in the adverse market conditions when the franchises face low demand (Marriott, 2017).
In order to reduce the operational risks, the company has a strong corporate governance mechanism. The company has audit committee that supervises the internal audit function and provides assistance to the external auditors (Marriott, 2017). The audit committee ensures that the auditing of the financial statements is carried out smoothly and in an independent manner. Further, the company follows the COSO standards in designing its internal controls (Marriott, 2017). The COSO standards are very useful in designing and implementing internal controls provide safeguard to the assets of the company and prevent any fraud or irregularity from occurring.
Prospects and Valuation of Common Stock
Recently, Marriot International Inc has completed the acquisition of Starwood which is expected to increase the company’s global presence. The Starwood hotels and resorts that operate all over the world are now owned by Marriot International Inc. This acquisition of Starwood by the company is expected to have positive impact on the stock’s price; therefore, it seems that high prospects of investment exist. Further, the financial performance and position of the company has also strengthened after the acquisition of Starwood. The trend in stock’s price of the company over the past one year could be observed from the chart presented below:
It could be observed that the stock was trading at $60 in April 2016. It increased gradually since September 2016. There were few ups and downs during this period. However, as soon as the merger deal between the company and Starwood finalized in September 2016, the stock picked the pace. The price increased rapidly between the period starting from September 2016 and ending in Aril 2017. In September 2016 the price was $66.84 which increased substantially to $92.47 in April 2017. Further it was observed that over the period of one year, the stock has provided a return of 37.04% at the standard deviation of 5.88% which appears to be satisfactory (Edwards, Bassetti, and Magee, 2013).
However, the intrinsic value as arrived at applying the dividend growth model depicts that the stock is overvalued. The relevant computations are shown as below:
|
CAPM of Marriott International, Inc |
|
|
Risk free rate (5 year bond yield) (Bloomberg, 2017) |
1.77% |
|
Beta (Yahoo finance, 2017) |
1.35 |
|
Market rate (Yahoo finance, 2017) |
19.45% |
|
CAPM |
25.64% |
|
Intrinsic value of common stock: Dividend growth model |
|
|
Expected Dividend |
1.41 |
|
Cost of equity (CAPM) |
25.64% |
|
Growth rate (3 year dividend) |
22.21% |
|
Intrinsic value |
40.9629 |
The intrinsic value of company’s shares is worked out to be $40.96 which is less than the price prevailing in the market ($92.47). As the intrinsic value is less than the market price, the stock is overvalued. Thus, if the decision to invest is taken based on the results of dividend growth rate model, it would be advisable not to invest (Shapiro, 2008). However, considering the growth in price in past few months, the investor might consider investing in the company’s stock. This is because the acquisition of Starwood has been done recently and its positive impact would be experienced in the coming few years. Thus, if the acquisition of Starwood happens to be positive for the company, the investor may earn huge money by investing in the company’s stock.
Conclusion
The report presented here aims to analyze the financial performance and position of Marriott International Inc and produce an advice on investment in the company. The results of analysis of financial performance depicts that previous two years have not been good for the company. The company was running with negative net worth in the year 2014 and 2015. However, the year 2016 has been positive for the company. In the year 2016, the company acquired Starwood, which affected its financial performance and position positively. The net worth of the company went from negative to $5,357 million. However, as a result of acquisition of Starwood, the company’s cost of operations increased and that reduced that net margin by a bit. It should not be the concern because the positive impact of acquisition will come out in the upcoming years.
The liquidity and solvency position of the company also improved in the year 2016 as depicted from the improvement in the current ratio and debt equity ratio. Further, the improvement in the efficiency ratios also indicates positive sing about the future prospects of the company’s business. Apart from this, analysis of operational risk depicts that due to expansion of business the operational risk has increased but the company has all the resources to keep it under control. The results of analysis of stock price depict increasing trend and a promising return for the investors. However, intrinsic value under dividend growth rate model indicates that the stock is overvalued in the market. Overall, it could be recommended that the investment in company’s stock may be a good choice, but the investor has to be decisive about the timing of purchase and sale.
References
Baker, H.K. 2009. Dividends and Dividend Policy. John Wiley & Sons.
Bloomberg. 2017. US bond yield. [Online]. Available at: https://www.bloomberg.com/markets/rates-bonds/government-bonds/us [Accessed on: 22 April 2016].
Coyle, B. 2004. Risk Awareness and Corporate Governance. Global Professional Publishi.
Edwards, R.D., Bassetti, W.H.C., and Magee, J. 2013. Technical Analysis of Stock Trends, Tenth Edition. CRC Press.
Kobyletskii, P. and Sakevych, A. 2015. An Introduction to the Financial Statement Analysis. BookRix.
Marriott. 2017. About Marriott International – Find Your World. [Online]. Available at: https://www.marriott.com/marriott/aboutmarriott.mi [Accessed on: 22 April 2016].
Marriott. 2017. Annual report of Marriott International Inc for 2016. [Online]. Available at: https://files.shareholder.com/downloads/MAR/4334786127x0x936409/834E45D9-8979-4190-AE47-702FBFF54755/Marriott_2016_Annual_Report.pdf [Accessed on: 22 April 2016].
Marriott. 2017. News center Marriott. [Online]. Available at: https://news.marriott.com/2016/09/marriotts-acquisition-of-starwood-complete/ [Accessed on: 22 April 2016].
Marriott. 2017. Our story. [Online]. Available at: https://www.marriott.com/about/culture-and-values/history.mi [Accessed on: 22 April 2016].
Shapiro. 2008. Capital Budgeting And Investment Analysis. Pearson Education.
Tarek al-Kayed, L. 2012. Capital Structure and Performance of Islamic Banks: Determinants and Optimality. Institute of Islamic Banking and Finance, International Islamic University Malaysia.
Tracy, A. 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. RatioAnalysis.net.
Vinella, P. and Jin, J. 2006. Corporate Governance And Operational Risk: A Practical Guide. John Wiley & Sons Australia, Limited.
Yahoo finance. 2017. Marriott International, Inc. (MAR). [Online]. Available at: https://in.finance.yahoo.com/quote/MAR/financials?p=MAR [Accessed on: 22 April 2016].
Yahoo finance. 2017. Marriott International, Inc: Summary. [Online]. Available at: https://in.finance.yahoo.com/quote/MAR?p=MAR [Accessed on: 22 April 2016].
Yahoo finance. 2017. NASDAQ Composite: Historical Prices. [Online]. Available at: https://finance.yahoo.com/quote/%5EIXIC/history?period1=1335033000&period2=1492799400&interval=1mo&filter=history&frequency=1mo [Accessed on: 22 April 2016].
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