Wednesday, June 07, 2006

Summer Stock Ideas: Four Seasons

Shares of Four Seasons (FS) are up 10% since we initiated coverage on the hotel powerhouse with a positive rating (on May 4th). We remain bullish on the hotel industry and look forward to a summer replete with high occupancy levels and expensive room service. Here is a "bite size" version of our feeling on the stock:

Positive Considerations Four Seasons manages and invests in hotel, resort and interval, fictional 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. Rival hotel operators appear too "mass-market oriented" for our liking; these competitors are debt-laden whereas Four Season's balance sheet holds plenty of cash and no debt. 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 unmistakable brand equity, we see plenty of reasons to like Four Seasons.

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.

Valuation With shares recently hitting our price/sales multiple objective (3 x peer group), a pullback is in order. Rating: HOLD; BUY at $52-$55 price range with moderate downside.

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