Marriott International, Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

Marriott International is a global hotel chain operating under various brand names with a mix of managed and franchised properties, facing a complex competitive landscape and relying on a franchise model for a significant part of its growth.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Let’s dive into the intricacies of Marriott International, Inc. (MAR), analyzing its moat, understandability, balance sheet health, recent developments, and more.

Business Overview

Marriott International, Inc. is a worldwide operator, franchisor, and licensor of hotel, residential, timeshare, and other lodging properties under more than 30 brand names across various lodging formats. Its business model primarily revolves around two operational structures:

1. Managed Properties: Marriott manages the day-to-day operations of hotels owned by third parties. They earn management fees based on total revenue or a percentage of profits, providing a more stable revenue stream but with limitations on upside growth. 2. Franchised Properties: Marriott licenses its brand names and operational systems to property owners who manage their day-to-day operations. Marriott collects franchising fees from these properties, resulting in higher profit margins but they have less control over operations and quality.

A mix of managed and franchised properties allows the company to grow at a faster pace and with less capital intensity, while also providing some stability through the management side.

Revenue Distribution:

  • Base Management Fees: These form the baseline earnings from managed properties.
  • Incentive Management Fees: Based on hotel performance, this is revenue generated by achieving certain milestones at their managed hotels. These form the higher upside for the company in its operations.
  • Franchise Fees: Derived from licensing the Marriott brand to third-party owners.
  • Other Revenues: Includes marketing fees, credit card fees and non-core revenue streams, a small but reliable segment of their operations.

Industry Trends:

  • The hotel industry, particularly the luxury and upper-upscale segments, has continued to experience strong growth. Post COVID recovery has been strong for luxury travel and they recovered quite well.
  • There is a steady but slow growth in mid-range/lower lodging, but the market is very competitive.

  • There’s a shift towards experiences and wellness in the industry. Hotels are trying to provide a unique experience that consumers value over just the basic lodging. This has led to changes in interior and amenity design.

  • Labor costs and availability is a big concern in the industry as it’s hard to attract and retain good employees.

  • Technology is rapidly changing how hotels operate as they implement newer ways of managing operations and improving customer experience.

Margins & Competitive Landscape:

  • Marriott has a high gross profit margin for its franchised hotels, since most of the fees are not directly attributable to operating expenses.

  • They have a moderate amount of operating margin, because it includes significant overhead and other operating expenses for their managed hotels.

  • The hospitality industry is fiercely competitive, with low switching costs for most lodging options. New entrants in the industry may erode the margins, and there is very little control over the prices they can set. The larger players who have established strong brands can more easily command a premium for their locations.
  • Intense competition exists among large chains and new entrants via digital-first Airbnb and other similar alternatives.

What Sets Marriott Apart?:

  • Brand Recognition: Marriott possesses a diverse range of well-known brands, that often attract customers through the promise of familiarity and quality.
  • Loyalty Program: The Marriott Bonvoy program is a valuable asset, which offers rewards and a seamless travel experience, and can tie up customers in their hotel network.
  • Global Presence: Marriott’s global reach and diverse brand portfolio are difficult to replicate for a smaller player.

Financials

Marriot’s Financial statements are a complex web of accounting decisions and complicated operating expenses, but we can summarize them into the key pieces of info that help understand the business and its economic moat:

  • Revenues: * Marriot’s FY 2022 revenue was $20,808 million. * Marriott had high double-digit growth in revenue between 2021 and 2022 due to rapid rebound of travel as the pandemic started receding.
  • Marriott’s Q3 2023 (three-months ended Sept 30) revenue was $5,934 million compared to $5,311 million in Q3 2022.
  • For the first three quarters of 2023, the company’s revenues was $17,675 million which is a substantial increase from $12,523 million in the previous three quarters. This is driven by both ADR growth and Occupancy.
  • Income:
  • Net income was $1,933 million in FY 2022
  • Net income attributable to the company was $701 million in Q3 2023, compared to $588 million in Q3 2022,
  • Net income for the first three quarters of 2023 is $2,015 million. They are on track to beat the net income of 2022.
  • Margins:
    • Marriot has an attractive gross margin that is consistent and has been increasing over the past few years. This is driven by the increase in revenues, and higher room revenues and management fees.
  • Operating Expenses:
    • Management and franchise expenses have been steadily rising year-over-year and these are directly related to the volume of business and have been higher year over year
  • Debt:
    • Long-term debt remains steady at $9.7 billion, slightly lower than previous quarter and YoY.
  • Cash and cash equivalent balances increased to $418 million in Q3 2023 compared to $343 million in Q3 2022.

These data points show that Marriott is a profitable company that has managed to grow after the pandemic, however, it needs to maintain a healthy cash position for the business operations.

Moat Assessment

Moat Rating: 3/5 - Narrow Moat Marriott possesses a narrow moat, stemming from the brand recognition, loyalty program, and its global reach.

  • Brand Recognition (positive): Marriott’s portfolio of brands, such as Ritz-Carlton, JW Marriott, and Courtyard, are very well-known, and this gives the company an edge over smaller independent competitors, allowing them to charge a premium over the normal price range of lodging. However, new brands from competitors can also enter the market.
  • Loyalty Program (positive): Marriott’s Bonvoy program is very sticky for a lot of travellers who want to maximize their rewards. This provides the company with a stable and returning customer base.

  • Global Reach (positive): Marriott’s extensive global presence and large scale are difficult for a competitor to replicate. * Switching Costs (negative): There are low switching costs for the travelers since, they can easily move between different lodging options. Also customers can easily adopt alternative lodging options.

  • Intangible Assets: Although patents and proprietary algorithms are not central to the business model, the company has a great database of customers, their preferences and their behaviour, which is hard for their competitors to get.

  • Scale Economies: Their economies of scale from managing and franchising thousands of hotels gives them a slight edge over other smaller businesses, but it is easily replicable.

Risks and Resilience

  • Economic Downturns: The hospitality industry is very sensitive to economic fluctuations, as seen during the pandemic. A recession could lead to lower travel spending, and a decrease in occupancy and rates for Marriot.

  • Competitive Pressures: The rise of new hotel brands, Airbnb, VRBO, and other alternative lodging options, poses a significant challenge to Marriott. This can dilute their brand power and force them to cut their prices.

  • Operational Risks: Operational issues, quality, and staffing shortages can impact revenues, margins, and their competitive position.

  • Regulatory Risks: Government regulations relating to franchising or taxation in some jurisdictions may impact their revenues and profit margins.

  • Reputational Damage: A significant data breach, data loss or negative news from one of the properties can also damage the trust between the company and its stakeholders.

  • Geo-political Risks: Because it’s a global company with properties in all regions, any geo-political or regional issues may hurt revenue. It also leaves the company exposed to risks such as economic volatility and currency fluctuations in those countries

Business Resilience:

  • The company has a good mix of both managed and franchised properties which allows them to mitigate economic downturns.
  • Their loyalty program helps them retain their customer base and they have established partnerships and strong financial relations.
  • They have significant scale advantages that allow them to compete against many competitors.

Understandability: 2 / 5

While the core business of hotel operation is straightforward, valuing Marriott’s financials is not so easy due to the complexity of its multiple revenue streams, and geographical locations, plus its franchising model. Investors need to have a strong working knowledge of accounting to appreciate the company’s long-term growth and returns on invested capital (ROIC). The constant competition and changing industry dynamics make it challenging for investors to evaluate the business accurately. Also forecasting future performance is also difficult given the complexity of the factors, which lowers the understandability.

Overall, the business is complex and is hard for new investors to understand it fully without significant time being spent. Hence, the understanding rating is 2/5.

Balance Sheet Health: 3 / 5

Marriot’s balance sheet shows some risks but they are likely manageable in the long-run:

  • Marriot has $9.7 Billion in long term debt, but their total liabilities and equity amounts are $22.8 billion. This shows a moderate amount of leverage that is consistent with their business model

  • They have increased their cash position from 2022 year end, which provides some extra cushion against short-term liquidity issues.

  • The company has a stable credit rating of BBB+, which is investment grade and reflects the soundness of their finances. This shows that the company can comfortably borrow capital if need be.
  • Their debt to equity ratio is moderate, given the capital requirements needed for both managed and franchised properties

Overall, the company is moderately healthy on the balance sheet, with some significant debt levels and intangible assets that could get into financial trouble if things go bad. Hence the 3/5 rating.

Recent Issues and Management’s Perspective

  1. Data Security Incident: In November 2022, a data breach that occurred in their reservation databases exposed personal information of some customers. While the company have taken measures to address these, any repeated failures can severely damage customer confidence and brand loyalty.
    • The company has implemented new guidelines for cybersecurity and is investing heavily in the IT sector in order to mitigate further damage.
  2. Impact of COVID-19: The global travel industry has been affected severely because of travel restrictions and a lack of desire to travel because of fear for safety. The management is cautiously optimistic that the future will return to normal, but the timeline for recovery is not set in stone.
    • The management is focusing on the luxury segment to make the most of the recovery, as well as on reducing overhead costs and operating expenses.
  3. Labor Shortages: In the Q3 2023 earnings call, it was mentioned that labor costs are a big concern in all of the major markets. However, they are trying to leverage technology, and better incentives to attract workers, and are working towards bringing those labor costs down.
  4. Macro-Economic and Geo-political Concerns:
    • Due to the nature of their business, they are highly susceptible to fluctuations in economic growth. A downturn could hurt revenues.
    • Also they are exposed to varying degrees of risk in different countries, and political problems in one country can quickly affect their profitability there.

Overall, there are still major risks to the company, and investors should be well aware of the pitfalls before getting into the stock, also valuation plays a big role in these kind of investments.

The key takeaways are that, while Marriott possesses a recognizable brand and unique strategies, it faces significant industry and operational risks and should be evaluated carefully by investors.