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Starwood (HOT) Q1 Earnings: Will Global Issues Hurt Stock?

Starwood Hotels & Resorts Worldwide Inc. HOT is set to report first-quarter 2016 results on May 3, before the opening bell.

Last quarter, this leading hotelier posted a positive earnings surprise of 12.66%, bringing the trailing four-quarter average to 10.75%, backed by positive earnings surprises in all the four trailing quarters.

Let’s see how things are shaping up for this announcement.

Factors to Consider

More than half of Starwood’s properties are located outside the U.S. which offers it an extensive international presence, but at the cost of being exposed to exchange rate fluctuations and various political issues. A stronger dollar is expected to continue to hurt the company’s revenue per available room (RevPAR), like the past few quarters.

Meanwhile, a weak performance in China, due to sluggish growth in Macau and Hong Kong, would continue to keep regional RevPAR soft. Results in Africa are also expected to remain volatile in the to-be-reported quarter due to a challenging environment.

Further, slowdown in most of the emerging Latin American economies is likely to hurt tourism. Moreover, dull performance in some parts of Europe and persistent economic weakness pose a threat to both the top and bottom lines. Further, the recent terrorist attacks in France and Belgium would affect travel to those regions. Meanwhile, low oil prices will remain headwinds in certain markets like Houston, and some parts of Western Canada, in turn dampening RevPAR. 

Moreover, revenues are expected to continue declining on a year-over-year basis in the residential business as a result of the sale of Bal Harbor, as has been the case for more than a year now.

Nevertheless, Starwood’s margins are expected to improve in North America and international markets backed by cost saving measures. North America, in particular, would benefit from economic growth, along with lower unemployment numbers and oil prices, which should translate to rising disposable incomes in U.S. households. Further, renovation of the Sheraton brand over the past few months is expected to aid the top line.

Moreover, supply growth in most regions remains well below the long-term average, despite an increasing pipeline of hotels, which would once again lead to higher occupancy, thereby compensating for the negatives and boosting RevPAR in the first quarter. Starwood, thus, expects earnings per share in the range of 56 cents to 59 cents.

Earnings Whispers

Our proven model does not conclusively show that Starwood Hotels is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here, as you will see below.

Zacks ESP: The company’s Earnings ESP is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 58 cents.

Zacks Rank: Starwood currently has a Zacks Rank #4 (Sell). As it is, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stocks to Consider

Here are a few stocks in the broader consumer discretionary sector that have a favorable Zacks Rank and a positive Earnings ESP, and are therefore likely to beat earnings:

Six Flags Entertainment Corp. SIX, with an Earnings ESP of +7.58% and a Zacks Rank #2.

Pinnacle Entertainment Inc. PNK, with an Earnings ESP of +23.21% and a Zacks Rank #3.

Brunswick Corp. BC, with an Earnings ESP of +1.41% and a Zacks Rank #3.

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