Starwood Hotels Rates a Closer Look

Starwood Hotels & Resorts Worldwide (HOT) (Jim: Buy)

(Mike: Buy)

Mike: If I understand correctly, Jim, this is a company that owns every hotel in the world, right?

Jim: No, just every glamorous hotel in the world. Or so Starwood Hotels & Resorts’ Chief Executive Barry Sternlicht would like you to believe.

Mike: Yeah, we’ll get to him in a minute. All kidding aside, Starwood is one of the biggest players in the lodging world. Not only does it own or manage more than 700 hotels in 80 countries, they include some of the swankiest in the business, like the St. Regis in New York, the Sheraton chain, the Westin chain--which includes the Bonaventure and Century Plaza hotels in Los Angeles--along with the Four Points and the W brand-name hotels.

Jim: Plus the Phoenician resort in Arizona and several other fancy ones overseas.

Mike: And I’ve stayed in quite a few of them.

Jim: On your expense account, I’m assuming.

Mike: No, sometimes I’ve spent my own money. I have to say, as a customer, I can’t remember a particularly bad experience in any of these fine hotels. Some of them have even gotten letters of praise from me to their managements.

Jim: Praise from you? Boy, they must really be doing something right. Anyway, Starwood is another example of how there can be vast differences between a company and its stock, because this stock has hardly glittered like the company’s hotels.

Mike: Though the shares have rebounded nicely in the last couple of months; they’re up more than 40% since early March. But you’re right: The stock has badly lagged the broader market for the last two years.

Jim: Starwood is basically the creation of Mr. Sternlicht. He’s known as a very savvy deal-maker who took what was a rather small-time real estate operator and, with a rash of acquisitions, built it into the company we see today.

Mike: Right. Now the rap on him is that he’s much better at deal-making than running the company. Case in point: Several of his top executives have fled, screaming, from the executive suite at Starwood.

Jim: The stock’s lackluster showing the last couple of years hasn’t helped. Certainly, though, we can lay part of the blame on the stock market generally, which hasn’t been too kind to real estate stocks. But Starwood’s financial results haven’t lit a fire under Wall Street, either.

So, the question is whether we think Sternlicht & Co. can leverage Starwood’s great properties and boost this company and its stock.

Mike: My answer is yes. In fact, I think Starwood is a buy right now.

Jim: Really?

Mike: Yes.

Jim: How so?

Mike: No. 1, it’s a fairly cheap stock. It’s selling for about 17 times Starwood’s expected per-share earnings for this year.

Jim: What else?

Mike: I also think Starwood’s performance has been better than Wall Street has given it credit for. And, simply put, if you’re going to own hotels, these are the ones to own. You’ve got a clientele that’s less price-sensitive than people going to Motel 6.

Jim: Yes, and you’ve also got much higher costs to provide all those swell services.

Mike: I know. But Starwood is a master of getting revenue out of everything. At these hotels, you seem to get almost nothing for free, whether it’s a cabana on the beach or a day of golf. You dig into your pockets a lot.

But look, these hotels are cash machines and they’re all high-end. And I believe Sternlicht knows Wall Street’s frustration and is making a strong effort to shed that rap about his being unable to run Starwood at peak performance.

Jim: I agree. The stock’s a buy. In the past, Sternlicht has blamed just about everyone, including the media, for Starwood’s problems. But he has also taken some of the blame himself and it appears he’s anxious to worry less about his reputation and his merger prowess and more about his company’s numbers.

Mike: His name, by the way, I believe translates into “starlight.”

Jim: Really?

Mike: If I’m wrong, our e-mail will be filled with messages from German language professors.

Jim: Anyway, I also think Wall Street is going to stop fussing around with Barry and his brash personality and start looking more closely at Starwood’s assets and the value they can generate. As you said, these are tremendous properties that throw off lots of cash, and Starwood is working to use more of the cash to pay down its pretty substantial debt from the acquisitions.

Mike: A very smart move.

Jim: Starwood also is renovating a lot of its properties and it’s expanding, particularly with the Sheraton chain in North America.

Mike: So what’s the downside risk with this stock?

Jim: There is one, actually. The whole hotel industry’s growth, in terms of room-rate revenues, is expected to slow. The industry has been building lots of new properties the last couple of years and so now occupancy rates are falling--not as many rooms have people sleeping in them. So to make up for that, many operators like Starwood are setting higher rates for many of their hotels’ various amenities.

Mike: Meaning it won’t be long before you’re paying a couple of bucks for the chocolates on your pillow.

Jim: Right. That is a concern. But, as you said, Starwood enjoys an upscale clientele that can absorb those costs, so I see its occupancy rates holding steady and its cash flow remaining strong.

Mike: And here’s another plus: Sternlicht’s new lieutenant, Chief Operating Officer Robert Cotter, says he actually plans on keeping his job for a while.

Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment.