Sheraton Owner Eyes Rapid Hotel Expansion In China

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Sheraton Hotel & Resorts ( HOT ) might be celebrating its 75th birthday this year, but the firm that owns it is acting like a 20-something with lots of cash to burn and a desire to go as far away from home as possible.

That company, Starwood Hotels & Resorts, operates and franchises more than 1,100 properties in nearly 100 countries. In addition to Sheraton, its brands include St. Regis, W Hotel, Westin, Aloft and Le Meridien.

Sheraton was founded in 1937 in Springfield, Mass. To mark Sheraton's 75th birthday, Starwood has been busy opening large and luxurious hotels in and around China.

On Sept. 20, it announced the opening of the Sheraton Macao Hotel, Cotai Central, which Starwood says is the largest hotel to open worldwide in 2012. The facility boasts nearly 4,000 rooms, a main ballroom the size of more than 11 basketball courts, more than 160,000 square feet of meeting space, three signature restaurants, and three outdoor pools with poolside cafes.

Starwood also recently announced the opening of the Sheraton Fuzhou Hotel in China's Fujian province.

Sheraton's first hotel in China, the Great Wall Sheraton in Beijing, opened in 1985. It has since become one of China's most sought-after global brands. This year, Starwood is slated to open 10 new Sheraton hotels in China, according to a recent report from Zacks Equity Research.

Aggressive Expansion

Starwood will likely maintain its aggressive expansion plan in China during the years to come.

"The company is now scrutinizing its opportunities in various untapped but highly populated Chinese cities," Zacks said. "Though Starwood's current U.S. portfolio is roughly seven times the number of hotels in China, the company expects China to outpace the U.S. in the near future. We believe that openings in second- and third-tier Chinese cities will provide the company a competitive advantage over most of its peers."

But China is far from being the only growth area for Starwood. The company continues to announce new properties at a dizzying pace.

In September alone, its website listed a dozen announcements of new or planned hotel projects on four continents.

More than half of Starwood's earnings come from outside the U.S., according to a report from Citibank analyst Joshua Attie. It generates 55% of its earnings from management and franchise fees, 35% from owned properties and 10% from time-shares.

"Starwood has a substantial international presence ... spread across numerous geographies and with significant emerging market exposure," Attie noted.

The company mainly operates in the upscale end of the hotel industry. That has been a tricky category to compete in, given some of the economic issues that have cropped up in key markets like North America and Europe.

Those issues contributed to weak results in 2008 and 2009, when Starwood reported a decline in annual sales and earnings. But the company has been in growth mode since then.

Last year, it grew earnings 54% and sales 11%. It was the first time since 2005 that the top line posted a double-digit gain.

Meanwhile, Starwood continues to target markets that are still on shaky economic ground. On Sept. 18, it announced a deal to open an Element branded hotel in Frankfurt, in October of next year. It will mark the debut of the energy-efficient Element brand in Europe.

The facility will be located near the Frankfurt Airport in a newly developed business district. It will give customers easy access to the global headquarters of Lufthansa and other large companies.

"Even though Europe remains the epicenter of the global crisis due to the continued eurozone debt problem, Starwood is hopeful about the overall European hospitaility environment," Zacks noted. "Management did not notice any acute slowdown in second quarter of 2012, with RevPAR (revenue per available room) growing 2% in Europe."

The RevPAR increase in Europe was actually the smallest regional gain during the quarter. RevPAR climbed 6.9% overall during the quarter. By region, it rose 7.3% in North America, 6.1% in Latin America, 11.2% percent in Africa and the Middle East and 9.3% in Asia-Pacific.

Revenue Growth

Starwood posted second-quarter revenue of $1.6 billion, up 13% from the prior year and above Wall Street estimates for $1.57 billion. Earnings gained 40% to 70 cents a share, topping views by 8 cents.

The company's stock price reached a 52-week high of 61.09 Sept. 14. It currently trades near 58.

The company's management offered an upbeat assessment of the travel market during its second-quarter conference call, says Ryan Meliker, an analyst at MLV & Co.

"Management indicated that they have seen no signs of business or leisure travelers beginning to curtail their travel," he noted in a report. "In fact, they indicated that group revenue pace is still up in the mid-single digits."

Analysts polled by Thomson Reuters expect Starwood to post full-year earnings of $2.53 a share, a gain of 31% from a year earlier. They expect 2013 profit to rise 8% to $2.72 a share.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

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