Standing out among the Street's worst performers today is Marriott International, a lodging company whose shares slumped -4.3% to a price of $228.5, 8.69% below its average analyst target price of $250.25.
The average analyst rating for the stock is hold. MAR lagged the S&P 500 index by -6.0% so far today and by -3.1% over the last year, returning 17.3%.
Marriott International, Inc. engages in operating, franchising, and licensing hotel, residential, timeshare, and other lodging properties worldwide. The company is a consumer cyclical company, whose sales and revenues correlate with periods of economic expansion and contraction. The reason behind this is that when the economy is growing, the average consumer has more money to spend on the discretionary (non necessary) products that cyclical consumer companies tend to offer. Consumer cyclical stocks may offer more growth potential than non-cyclical or defensive stocks, but at the expense of higher volatility.
Marriott International's trailing 12 month P/E ratio is 23.6, based on its trailing EPS of $9.69. The company has a forward P/E ratio of 21.1 according to its forward EPS of $10.81 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the second quarter of 2024, the consumer discretionary sector has an average P/E ratio of 22.15, and the average for the S&P 500 is 28.21.
To better understand MAR’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.
Marriott International’s PEG is 3.78, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Marriott International's free cash flow, which was $2.72 Billion as of its most recent annual report. Over the last 4 years, the company's average free cash flow has been $1.68 Billion and they've been growing at an average rate of 13.9%. With such strong cash flows, the company can not only re-invest in its business, it can afford to offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in MAR have received an annualized dividend yield of 0.9% on their capital.
Marriott International is likely overvalued at today's prices because it has an average P/E ratio, no published P/B ratio, and generally positive cash flows with an upwards trend. The stock has poor growth indicators because of its weak operating margins with a positive growth rate, and an inflated PEG ratio. We hope this preliminary analysis will encourage you to do your own research into MAR's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
