EQUITY RESEARCH REPORT ON MARRIOTT INTERNATIONAL

Haohan Xu
JOHNS HOPKINS UNIVERSITY-CAREY BUSINESS SCHOOL 100 International drive, Baltimore, MD, 21202

Summary of Investment Thesis Sector: Lodging, Overweight Price target as of 12/31/2013:$ 39.16 Current Share price as of 09/27/2013: $ 42.35 Ticker: MAR-NYSEMarket Perform (Hold) Marriott is a well-established lodging company with steady revenue growth and increasing global presence. Based on the valuation results, it showed that Marriotts stock price is slightly overvalued at this time. My models are based on conservative growth rates and profitability figures; therefore, the share price could be potentially higher if the lodging industry have better fundamentals and Marriott improves its profitability metrics. I rate the shares Hold as there also exists downside risks, such as refinancing risks and contract renewal risks, which are inherited in lodging industry.1

Source: Bloomberg, L.P.

Company Description Marriott International has grown to be a leading lodging company with 3,801 (660,394 rooms) properties in 74 countries and territories worldwide, including 35 home and condominium (3,927 units). Four business segments: North American Full-Service Lodging, North American Limited-Service Lodging, International Lodging, and Luxury Lodging. Operated 43% of the hotel
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rooms under management and earns base management fees, operated 54% of the hotel rooms under franchise agreements, and earns franchise fees from unconsolidated joint ventures 1% and we owned or leased only 2%.

Source: Bloomberg, L.P. Industry Overview and Competitive Positioning Porters five forces analysis on US Lodging Industry: Overview: In 2012, the lodging industry generated $39.0 billion in pretax income, an increase of 13.4% over 2011. Total industry revenue was $155.5 billion, an $8.1 billion increased over 2011. 2The lodging industry is recovering in 2012, primarily due to a recovery in leisure and corporate demand and a short of supply. US hotels overall have experienced improved operating fundamentals. Both growth occupancy and rate are expected to grow in the next few years, with a RevPAR CAGR of 7.2% by 2016. Luxury segment achieved the highest RevPAR gain in 2012. 3 The lodging industry is growing while competition intensifies because most hotel chains are expanding globally and improving their services to retain customers.4 Suppliers are also gaining bargaining power due to shortage of available properties. In conclusion, the overall threat is medium. Bargaining Power of Suppliers, high - Premature termination of management or franchise agreements, most hotel chains do no own many real estate, but rely on their management for base management fee, and franchise for

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royalty fees. Around the globe, major hotel brands continue to move to an asset -light model.5 which gives suppliers- franchisees more power to bargain with hotel chains. -According to the Cornell Hospitality Report, if a hotel enhances its review score by 1 point on TripAdvisors 5 point scale, it can increase its rate by 11.2%, while maintain the same occupancy or market share. Travel intermediaries such as Expedia.com, Travelocity and TripAdviors have gained increasing bargaining power, pressuring hotel profits.6 Bargaining Power of Customers, medium -Social network sites and other travel intermediaries allow customers to compare prices and book at last minute, hurting hotel chains profits. Threat of New Entrants, low -Entry barrier is high due to high capital requirement and existed learning curve to achieve economies of scales -Most hotel chains have royalty programs that offer existing customers incentives for their patronage, making it harder for new hotel brands to attract new customers. Threat of Substitutes, medium -Many substitute hotels are available to Customers can switch to different hotel chains at little cost. Competitive Rivalry between Existing Players, medium - Most hotel chains focus on product differentiation in their segmented markets and they compete on services rather than price. -Horizontal integration in lodging industry enabled hotel chains to cut costs and penetrate new markets by aggressive promotions.

Competitive Analysis MD&A highlights& Growth strategy: Marriott business model focused on managing or franchising hotels to minimize capital investments and financial leverage. Emphasis on long-term management contracts and franchising to provide more stable earning and retain financial flexibility.7 (Valuation
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projections corresponded to the companies strategies and forecasted lower Capital Expenditure and Financial Leverage ratio overtime). At the end of 2012, Marriott Company has also reorganized its business into four distinct segments: North American Full Service, North America Limited Service, International Lodging and Luxury Lodging after the spinoff of MVW the timeshare segment of Marriott. 8 This corporation reorganization indicated the managements differentiation strategy. Decreasing expenses are expected due to specialization, cost integration and economies of scale. SWOT Analysis Strength: -Great brand recognition, 98% of revenue came from management and franchise agreements, only 2% from property owned or leased, making Marriott less venerable to real estate value fluctuations. -Global Market Presence: Marriotts global expanding strategy both reduced its operation risk by diversification and increased Net Income from lower non-US market tax rates. -Eco conservation leader for several decades: LEED certified, Marriott was the first in hospitality industry to launch green hotel prototypes.9 Weakness: -Poor credit ratings: BBB by S&Ps, makes it costly for debt financing. Opportunities: - Major events: 2014 FIFA World Cup and 2016 Summer Olympic Games, have fueled international investment, resulting in creases in hotel value.10 Threats: - Weak economic conditions makes it difficult for Marriott to raise capitals. 76% of Real Estate and Hospitality and Construction respondents feel the global economy is showing no sign of improvement.11
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- Disasters and terrorist attacks. - Changes in privacy law could adversely affect Marriotts promotion tactics. -Group bookings frequently exceed Marriott projections, and it increases 6% yoy. Large buying volume gives customer the power to bargain.12 Investment Summary

(As of 12/31/2013) Valuation

Source: Bloomberg, L.P FCFF: Note: All figures are in millions, except for price per share, multiples, %, and days.

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Source: Company Reports and Bloomberg, L.P

Source: Company Reports and Bloomberg, L.P

Source: Company reports and Bloomberg, L.P.

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Source: Company Reports and Bloomberg, L.P Ratios and Assumptions: Forecasted Marriotts future revenues for 4 segments and used sum of part s method to compute the total revenue. Revenue growth rate in each segment is calculated as: (1+ % of Location)*(1+RevPAR %)-1 Cost of Revenue and Operating Expenses: Assumed the cost of revenue to decrease overtime, due to the economies of scales after Marriott Timeshare segment spinoff (MVW). Effective tax rate: is forecasted to be lower than marginal US tax rates. Based on assumptions 1. Marriott has deferred tax liabilities and benefits. 2. Non-US markets have lower marginal tax rates. Terminal Growth Rate: implied by the EBIT growth in hotels & games industry from the data compiled by Aswath, Damodaran.13 Comparable companies: 1. Starwood Hotels & Resorts Worldwide, Inc.: it owns, manages, and franchises luxury and upscale hotels throughout the world. The company also develops and operates vacation interval ownership resorts 2. Choice Hotels International, Inc.: it franchises hotel properties. The company franchises hotels throughout the United States, Puerto Rico, and the District of Columbia, as well as other countries. Choice Hotels properties operate under the Comfort, Qualit y, Clarion, Sleep, Rodeway, Econo Lodge, and MainStay brand names.

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3. Hyatt Hotels Corp is a global hospitality company. The company manages, franchises, owns and develops branded hotels, resorts and residential and vacation ownership properties around the world. 4. Orient-Express Hotels Ltd. Owns and operates luxury hotels, tourist trains, a river cruise ship and restaurants. Source: Bloomberg, L.P

Source: Bloomberg, L.P

Used median multiples to exclude outliners. Rationale of selected multiples: FCF multiple: Discounted all the FCF to measure a companys ability to generate cash inflows using its resources. EBITDA is a useful measure for a companys operating performance, because it measures a companys ability to service debt, fund capital expenditure and expand business. EPS: The P/E multiple gauges a companys equity value relative to its equity earnings figures.
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In conclusion: The financial model is robust in terms that the equity value per share implied by FCFF, and other multiples are close to $42.35- what Marriott is currently trading as of 09/27/2013. I chose the median number $39.16 to be the target price as of 12/31/2013.

Financial Analysis

Source: Company Reports and Bloomberg, L.P

EPS
3.5 3.0 2.5 2.0 1.5 1.0 0.5 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017

Key ratios:

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Source: Company Reports and Bloomberg, L.P Comments: Revenue growth is steady with improving EBITDA, EBIT and NI ratios. The ratios were derived on the assumption that costs will decrease gradually as a result of both learning curve and company reorganization.

Source: Company Reports and Bloomberg, L.P Comments: Assumed a low cash balance as suggested in the MD&A. Fixed assets to grow moderately- low capital expenditures except for improvement and renovation purposes. Working capital will be negative (Current liability finances for current assets), and current ratio will be 0.5. Forecast drivers are in line with managements objective to minimize working capital by cash management, strict credit granting policy, and aggressive collection efforts.

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Source: Company Reports and Bloomberg, L.P Comment: Marriott has a Credit Facility agreement with current debt capacity of 1,321 million. Assumed Marriott to improve their interest coverage ratios to obtain favorable debt financing terms.

Source: Company Reports and Bloomberg, L.P

Source: Company Reports and Bloomberg, L.P Comments: Days of accounts receivable, inventories, and accounts payable are forecasted based on historic averages. Return on sales increases steadily over projection periods. Risks to the Thesis Upside risk: the fundamentals in the US may recover more than what forecasted. RevPAR was conservative, ranged from 3.3% to 4.9% for segments, comparing to the average RevPAR of 7.2% predicted by Ernst and Young Inc.14
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Downside risk: 1. Operating expense could be higher than forecasted. The growth in EBITDA and FCF were built on the assumption that operating expense will decrease gradually in the future. 2. Financing risks: though, Marriott has Credit Facility agreements with various lenders. Deteriorating market conditions and smaller coverage ratios will make it difficult to obtain favorable financing means, which in term limits the growth potential of Marriott. 3. Premature termination of contracts. 4. The spin-off of Marriott Vacations Worldwide Corps could give rise to Marriotts tax liability, and might also reduce the cash tax benefits.15

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Marriott Company, http://www.marriott.com/marriott/aboutmarriott.mi, (accessed Sep 21th, 2013) American Hotels and Lodging Association and http://www.ahla.com/content.aspx?id=35603, (accessed September 2013) Ernst& Young, Global Hospitality Insights-Top Thoughts for 2013, http. www.ey.com/Publication/vwLUAssets/.../Top_thoughts_for_2013.pdf (accessed Sep 29th, 2013), Ibid Ibid Chris K. Anderson, PhD, The Impact of Social Media on Lodging Performance, Cornell Hospitality Report, Vol. 12, No. 15, November 2012. Marriott Company, 2012 Annual Report, http://investor.shareholder.com/mar/releases.cfm Ibid Ibid Ernst& Young, Global Hospitality Insights-Top Thoughts for 2013, http. www.ey.com/Publication/vwLUAssets/.../Top_thoughts_for_2013.pdf (accessed Sep 29th, 2013) Ibid Marriott Company, 2012 Annual Report, http://investor.shareholder.com/mar/releases.cfm Damodaran, Aswath, PhD, http://pages.stern.nyu.edu/~adamodar/, (accessed Sep 28th, 2013) Ernst& Young, Global Hospitality Insights-Top Thoughts for 2013, http. www.ey.com/Publication/vwLUAssets/.../Top_thoughts_for_2013.pdf (accessed Sep 29th, 2013) Marriott Company, 2012 Annual Report, http://investor.shareholder.com/mar/releases.cfm

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