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Will HOT Stay hot under MAR?

Has Marriott Snatched Defeat From the Jaws of Victory?

By Jonathan Berr April 5, 2016 7:15 am EDT

Marriott International Inc. (NYSE: MAR) has won the battle for Starwood Hotels and Resorts Worldwide Inc. (NYSE: HOT) after an investment team lead by Chinese insurer Anbang folded its tent in the face of opposition from regulators in the world’s most populous country. Unfortunately, shareholders of the storied hotelier may wind up being the loser.

The $13.6 billion deal, which Marriott sweetened after getting into a bidding war with Anbang, for the parent of the St. Regis and W. lodging brands, among others, works out to $79.53 in cash and stock. It was a stretch for the storied Maryland hotelier. According to Marriott’s own estimate, the deal would be “roughly neutral” to adjusted earnings per share in 2017 and 2018. That estimate may be based on wishful thinking, if past merger pronouncements are any guide, as is Marriott’s forecast for “one-time transition costs” of $100 million to $130 million. Moreover, Wall Street analysts raised eyebrows over the companies’ claims that Starwood’s Element extended stay service could be an “interesting alternative” for Airbnb, noting that popular room-sharing service reaches a much different demographic.

Then there’s the not-inconsiderable risk the companies face in merging their loyalty programs. Marriott and Starwood have to combine these programs very carefully to avoid angering its best customers by unintentionally cheating them out of their hard-earned points. Marriott also will unload Starwood’s real estate assets, furthering its strategy of managing hotels rather than owning real estate.

Marriott and Starwood do complement one another. Starwood offers Marriott cache with wealthy young millennials through its W Hotel brand, among others. Marriott’s convention and resort businesses also will benefit from the merger, and the companies will also be able to expand their digital footprint.

Nonetheless, Wall Street isn’t jumping for joy over the deal, even though it would create the world’s largest hotel chain. Indeed, shares of Marriott are flat for the year. Analysts, though, are encouraging investors to “check out” the stock, which trades at almost a $10 discount to its average 52-week price target of $75.10. Its 21 price-to-earnings (P/E) multiple is a premium to rivals such as Hilton (15.6), Wyndham (14.7) and Holiday Inn parent Intercontinental Hotels (4.9). Marriott is a bargain compared with Hyatt, with its valuation that tops 56.

According to the Wall Street Journal, the Marriott-Starwood deal will lead to more deals. Hyatt Hotels Corp. (NYSE: H), which was outmaneuvered by Marriott for Starwood; closely held Carlson, which owns the Radisson chain; and Intercontinental Hotels Group PLC (NYSE: IHG) are at various stages of considering potential mergers. Yet, Marriott is a solid operator known for its fiscal discipline, which makes it the only stock in the sector worth owning.

By Jonathan Berr

Read more: Is the Marriott-Starwood Deal Good for Shareholders? (NYSE: MAR) (NYSE: HOT) - 24/7 Wall St.
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Technical Perspective (HOT and MAR)

HOT Daily Chart 4/6

(click to enlarge)

HOT has been underperforming since 2014, trading flat before falling in the second half of 2015. 2016 has been an exciting year for the hotel operator because of competing suitors for acquisition between Marriott and Chinese State-backed insurance group Anbang, whose been going on an acquisition spree.

Now, after Anbang folded, HOT also retreated, but not after a run from roughly 67 to 84, a 40% rally in 2016 so far! 

Correction; Key Support:
I think HOT is now going to retreat back towards the 72 area, which would be like the central pivot of the 2016 rally. Between 70 and 72 is also where the cluster of 200-, 100-, and 50-period simple moving averages (SMAs) reside. If there are no hiccups with the deal, and HOT eventually anchors above 70-72, I would take that as evidence that HOT's bearish trend has reversed into a bullish trend after being acquired. Also, watch the daily RSI come down towards 40. If it can hold above 40, we have maintenance of bullish momentum. Otherwise, the market is likely going to remain in consolidation, or even revert back to the bearish trend.

MAR Daily Chart 4/6

(click to enlarge)

Bullish Momentum Being Challenged: 
MAR is retreating after a 2016 rally from about 56.40 to almost 74. The retreat is an indication that the market is uncertain about the benefit of the acquisition.

Price is now at a key support area. There are some common support pivots and 63 is right on top of a price bottom. If price can refrain from falling under the cluster of 200-, 100-, and 50-day SMAs, then, it can keep the bullish reversal scenario alive. If it starts to trade under this cluster and even respect this cluster of SMAs as resistance, MAR would likely in a bearish continuation.

Also the RSI has tagged 70 and is now testing 40. If it can hold above 40, forgiving a very brief violation, then bullish momentum in 2016. 

It seems like the market is more excited for HOT than for MAR in this deal. The two will make the largest hotel chain in the world, and has a chance to leverage their synergy. I have a slight bullish bias for both of these stocks, with a stronger one for HOT than MAR because of the technical pictures. I would consider buying on a HOT dip to 72.