Taking Stock by Malcolm Berko

Marriott Investors Sleep Easy

Dear Mr. Berko: I know that Marriott International franchises most of its hotels, like the Courtyard or the Ritz-Carlton, to third parties. What is your opinion of Marriott, and do you know what it would cost me to buy a Courtyard franchise? -- S.L., Oklahoma City

Dear S.L.: Most folks aren’t aware Marriott franchises 53% of its properties and has management contracts on 43% of its other properties. Marriott depends heavily on its impressive brands to attract growth from third-party owners.

Franchise contracts run for 20 years with renewal options up to 50 years. A Courtyard by Marriott franchise requires a total investment between $7 million and $10 million. The franchise fee is $60,000 or $500 per room, whichever is greater. Franchises for a Ritz-Carlton or a Bulgari will cost much more than a bit more. Though I doubt you’ll get a Courtyard franchise -- Marriott carefully selects franchisees before it builds a Courtyard, and you must have substantial experience to qualify.

I travel frequently to speak in many cities where this column appears, and I've never, ever had a bad stay at a Marriott, which is certainly the most iconic and visionary name in hospitality. I’ve never stayed at any of Marriott’s 101 Ritz-Carlton locations, 41 St. Regis Hotel Resorts, 55 exquisite W Hotels, eight stunning Edition properties, 107 elegant Le Meridien facilities, six lavish Bulgari premises, 175 stylish Renaissance accommodations or 84 magnificent JW Marriott hotels. I always stay at their ubiquitous Courtyard by Marriott or a Residence Inn. Marriott has over 6,500 lodging properties, 4,900 of which are in North America, with the remainder in Asia, the Middle East, Africa and Latin America, totaling 1,262,000 rooms and 1,518,000 bathrooms, all with flush toilets.

John Willard Marriott and Alice, his wife, became convinced that residents living in the humid summers of Washington, D.C., needed a cool place to drink and opened a root beer stand in 1927. They expanded to a chain of Hot Shoppe restaurants, going public in 1953. Four years later they opened the Twin Bridges Marriott Hotel in Arlington, Virginia, and later a second hotel, the Key Bridge Marriott, in Miami. When their son, J.W. Marriott Jr., took over from daddy in 1968, Hot Shoppes was renamed the Marriott Corporation, and J.W. expanded the company to the behemoth it is today. In 2012, after 50 years of managing and caring for Marriott (MAR-$136), J.W. gave his master key and CEO responsibilities to 60-year-old Arne Sorenson, who was born in Japan. He now runs the largest publicly traded hotel chain in the world.

Arne’s portfolio acquisitions, including Starwood Resorts, should beget record revenues of $22.8 billion in 2019, up from $11.8 billion when he became CEO. Cash flow has grown over 350% since 2012, earnings are expected to zoom to $6.40 this year from $1.72 in 2012, while the dividend has exploded 385% to $1.64. Operating margins improved to 14.3% from 8.1% in 2012. And this year, MAR’s net profit margins should rise to 10.9% from 4.3% in 2012. MAR traded at $35 when Arne got the keys from Junior -- almost topping $150 last year. This was made possible by Arne’s masterful management team and carefully selected franchisees who have made MAR the largest hotel franchisee in the world by orders of magnitude. There are 900 lodging management companies and only nine with more than 100 properties -- MAR has over 2,000 company-owned properties.

Considering MAR’s impressive brand-name recognition and outstanding management, the Street reckons revenues five years out could reach $30.3 billion. Share earnings should improve to $7.85 with a dividend of $2. So, figuring an average annual P/E ratio of 23, MAR could trade at $180 a share. That’s not a bad gain if you buy the stock instead of the franchise.

(Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com.)