Marriott Looks Ahead to Its Future With Starwood

By Markets Fool.com

With the economic expansion in the U.S. and the continuing globalization of the world economy, the hotel industry has benefited from increased demand. Marriott International (NASDAQ: MAR) has tapped into that demand with strong long-term results, and its recent completion of its merger with Starwood Hotels & Resorts helped give Marriott an even better competitive position. Coming into Monday's third-quarter financial report, Marriott investors were hoping to see solid gains in its results, and the hotel company largely came through on that front. However, some elements of Marriott's guidance left investors wanting more. Let's look more closely at the latest from Marriott and what it says about the hotel industry's future.

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Image source: Marriott.

Marriott moves forward

Marriott's third-quarter results reflected continued success in the hotel industry. GAAP revenue climbed 10% to $3.94 billion, including the eight days of revenue that Starwood provided for the quarter. Adjusted net income of $235 million was up 12% from year-ago levels, and that produced adjusted earnings of $0.91 per share, $0.03 better than the consensus forecast among investors.

Marriott was careful to try to break out figures related to the merger. On an adjusted basis looking only at Marriott's pre-merger operations, sales were up 5% to $3.77 billion. Net merger-related costs of $179 million were left out of adjusted net income figures, which sent GAAP net income down by two-thirds from the year-ago period.

Looking at some of Marriott's key metrics, revenue per available room for comparable properties systemwide rose 2.2% on a constant-currency basis, using pro forma results that incorporate both Marriott and Starwood legacy properties. North America's results were similar, with a 2.6% rise in comparable RevPAR. International properties didn't grow as quickly, with just a 1.1% rise in comps. The company also said that RevPAR for Marriott properties outpaced the figure for Starwood properties by a percentage point, although Starwood outpaced Marriott in North America.

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As we've seen in past quarters, the biggest boost to Marriott's revenue in percentage terms came from rising incentive management fees, which were up 14% on an adjusted basis. Base management fees were up just 1%, and a 5% rise in franchise fees also helped benefit the top line. Improvement in house profit margin, strong international distribution, and higher revenue per available room were primarily responsible for the boost to incentive fee income.

Even with the big gains from the Starwood merger, Marriott continued to work toward increasing its reach. The company boasts a pipeline of nearly 420,000 rooms globally, and Marriott anticipates 6% growth from net room additions in 2017. Combined at quarter-end, the post-merger Marriott had nearly 1.6 million rooms either open or in its development pipeline.

CEO Arne Sorenson was happy with the progress that Marriott has made. "We are enthusiastically engaged in welcoming Starwood's associates around the world into the Marriott family," Sorenson said, "and are working diligently on integrating the companies and realizing revenue and cost synergies as quickly as possible."

What's ahead for Marriott?

Already, the move to combine the loyalty programs of both companies is paying rewards for Marriott. The company now has more than 85 million members in its programs, and Sorenson said that they're happy about the combination and opportunity to earn points from a wider range of accommodations.

Yet Marriott gave a slightly mixed outlook for the fourth quarter. The company is looking for comparable RevPAR to be flat to up 1% in North America and worldwide, slowing from its third-quarter pace. Earnings of $0.80 to $0.85 per share would be less than the $0.88 consensus forecast among investors. Looking out further, Marriott says it thinks that net room additions for the full 2016 year will amount to about 5%, and for 2017, it predicts systemwide constant-currency RevPAR to be flat to up 2% from 2016 levels.

Perhaps because of that guidance, Marriott investors didn't seem satisfied with the news, sending the stock down almost 3% in after-hours trading following the announcement. Nevertheless, in the long run, the combination of Marriott with Starwood will be an exciting growth opportunity, and if Marriott can cash in on it, then it could lead to substantial gains in the company's fundamental financial performance going forward.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Marriott International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.