Hotel Franchises

Streetwalker: Room At The Inn
03.06.00
Room at the Inn

IT HAS BEEN HEARTBREAK FOR HOTEL stocks lately. Fearing overcapacity generated by a recent room-building boom, investors have pushed the sector down 15% over 12 months, even as the S&P 500 rose 14%.If the fears prove true, Mark Greenberg, portfolio manager at the $600 million Invesco Leisure Fund, sees a prize in hotel manager and franchiser Marriott International. Shares of the hotelier ($8.7 billion in 1999 revenues) have fallen 11% in the past year. Marriott mar (nyse: mar - news - people) is trading at 20 times trailing earnings, cheaper than the S&P 500's 29.Unlike most hotel companies, Marriott's profits, which are growing 15% a year, come from managing and franchising hotels under long-term contracts--not owning them. These fees, which Marriott takes as a percentage of hotel revenues, provide steadier earnings sources than hotel owners enjoy. Sister company and hotel-owner Host Marriott must deal with high fixed operating costs and earns profits out of what's left over. So changes in room rates or occupancy have a bigger impact on Host Marriott's bottom line, making it more vulnerable to business swings than hotel managers and franchisors are.--John Gorham On the Defense WALL STREET DECIDED IT DIDN'T LIKE General Dynamics when it was just in the defense business, a beaten-down sector. Then the company diversified in mid-1999 by acquiring corporate jetmaker Gulfstream Aerospace for $5.3 billion, but investors still didn't like the stock. They suspected that the high-end business-jet sector had peaked. When the company beat analysts' estimates by three cents a share for the fourth quarter, investors yawned. General Dynamics gd (nyse: gd - news - people) is down 45% since last May.But Joseph Nadol, a Donaldson, Lufkin & Jenrette analyst, says General Dynamics' corporate-jet orders continue to be strong, and Gulfstream already has proved to be the company's most profitable division, furnishing 40% of 1999 operating earnings, pro forma. And there's life left in the defense realm. The Navy is set to rebuild its aging fleet, and the company's industry-leading shipbuilding arm should benefit. At a P/E of 9, the stock's cheap. --Christopher Helman Puff Piece TOBACCO'S LITIGATION NIGHTMARE isn't over yet. A monumental class action is going forward in Florida, which could cost tobacco companies plenty on top of their $206 billion settlement with the states.So Philip Morris, the top player with 50% of the U.S. market, would get hit the worst. Well, don't worry, says Bonnie Herzog, analyst at Credit Suisse First Boston. She thinks the suit won't go anywhere. Meanwhile, Philip Morris mo (nyse: mo - news - people) will continue to romp in its arena.While fewer Americans are smoking, giant Philip Morris keeps gaining market share. Plus, the company is nicely diversified, which rivals can't say. Kraft Foods and Miller Brewing, America's largest processed-foods company and second-largest brewer, generate 40% of revenue. Philip Morris, which has lost half its value over the past 12 months, is cheap, with a P/E of 6. --C.H. Cell Division FOR DRUGMAKERS, GAINING FOOD & Drug Administration approval is the make-or-break issue. For Cell Pathways, some encouraging news from the regulators--that its new product Aptosyn had bypassed an FDA approval committee and was set for final consideration as early as May--has jolted the stock and sparked favorable press coverage. Cell Pathways clpa (nasdaq: clpa - news - people) jumped 300% to $51 since its mid-January FDA announcement.But analysts at Avalon Research Group are skeptical. Early tests of the drug showed it was about as effective as a placebo, though Cell Pathways later reformulated its data and got better results. But Avalon thinks the FDA may not approve it.And it's not encouraging that trials for Aptosyn, which aims to retard colon cancer for those with intestinal polyps, are in combination with an already-approved drug from Roche Laboratories, Xeloda. If Aptosyn is effective, Avalon says, the drug should stand on its own. Short the stock; cover at single digits.

--Michael Freedman

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