Finding Reasons to Buy Four Seasons: FS
Hotel giant Four Seasons (FS) will report earnings before the open today -- here's a quick look at the stock's strengths and weaknesses. Overall, we are moderately bullish on shares of the Canada-based company.Overview Four Seasons manages and invests in hotel, resort and interval, fractional and whole ownership residential properties throughout the world. It operates in two segments: Management operations and Ownership operations. The Management operations supervises all aspects of hotel operations on behalf of the hotel owners. This segment also includes the licensing and managing of residential projects and clubs. The Group has 70 hotels in 31 countries and more than 27 properties under development. It operates in Canada, the US, Europe, Asia, and the Middle East.
The most attractive aspect of this company/stock is its historical 45% operating margins. We believe this is due to the firm's success in the luxury niche and refusal to compromise its brand strengths during economic downturns. The company currently has a strong pipeline that includes new hotels in Macau and Taipei. The Macau project should compliment the rapid ascent of casinos and gaming facilities in the region. Although 4 Seasons posted losses in 2005 (the firm was busy writing off 3 hotels it no longer wanted to own), it said that average room revenue per available room (REVpar, a widely used metric in the lodging industry) rose over 7 percent worldwide to $224 and increased 11.5 percent in the US to $276.
Valuation At 8 x sales, Four Seasons has little room for error. Other hotel operators -- although too "mass-market oriented" catch our attention -- trade at both lower price/sales and price/earnings ratios. On the other hand, most of these competitors carry plenty of debt whereas Four Season's balance sheet is clean. The company also has $242M cash on the books. At 30 x 2007 results, we'd wait for a pullback, especially for a name that lost money in 05 and has little operating leverage to cheer about.
Risks Hotels are a cyclical business in general. Occupancy rates tend to plummet when the economy suffers. However, because 4 Seasons has its hotels run by outside owners (who sign contracts spanning as long as 60 years, eons ahead of the industry standard), it doesn't have to pay the heavy fixed costs that are a hallmark of the industry. And the sheer fact that 4 Season's market share grew after September 11 tells us that the firm has its clientele on lock and that it can weather storms other hotels drown under.
The Bottom Line With several growth opportunities on the horizon (4 Seasons should add 8 hotels per annum), some of the best management in the hotel industry, and an impenetrable brand customers unmistakably return to, Four Seasons is a hotel we'd gladly invest in. At the current price, however, we'd wait until Four Seasons got its earnings picture back in order before amassing a large position. For now, it wouldn't hurt to nibble at the stock and await what the rest of 2006 brings us.
Update: Shares popped 17% in Friday trade after FS doubled profit from a year ago, smashing analyst estimates.
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