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| Title | Marriott Corporation, 1980 Annual Report |
| Creator (LCNAF) |
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| Publisher | Marriott International, Inc. |
| Date | 1980 |
| Description | Marriott Corporation Annual Report for calendar year 1980. |
| Subject.Topical (LCSH) |
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| Subject.Name (LCNAF) |
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| Genre (AAT) |
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| Language | English |
| Type (DCMI) |
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| Original Item Location | Marriott Hotels Collection |
| Digital Collection | Annual Reports from the Hospitality Industry Archives |
| Digital Collection URL | http://digital.lib.uh.edu/collection/hiltonar |
| Repository | Hospitality Industry Archives, Conrad N. Hilton College of Hotel and Restaurant Management, University of Houston |
| Repository URL | http://www.uh.edu/hilton-college/About/hospitality-industry-archives |
| Use and Reproduction | No Copyright - United States |
| File Name | index.cpd |
| Title | Image 25 |
| Format (IMT) |
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| File Name | hiltonar_201609_052_025.jpg |
| Transcript | Shares Undervalued Common stock valuation—like analysis of any investment—is a function of an after-tax cash flow stream, its rate of growth, and an appropriate discount rate reflecting business risk, financial leverage and inflation. When a discount rate reflecting Marriott's cost of capital is applied to the total relevant cash flows, fundamental investment analysis yields a substantially greater value for Marriott stock than the market recognized. The market's failure to appreciate Marriott's value derives from three factors: 1. Historical cost accounting understates both the value of Marriott's real estate-based assets and its investment capacity. 2. The market overemphasizes short-term earnings per share without examining the nature and magnitude of the underlying cash flows. 3. The market underestimates Marriott's future growth. Understated Asset Values Historical cost accounting understates Marriott's asset values and debt capacity—resulting in a misper- ception of the company's cost of capital and the discount rate applicable to its cash flows. The company's fixed assets are principally real estate with building and equipment depreciated according to industry accounting standards. For example, the average depreciated book value per room of Marriott's owned hotel rooms is $32,000. Yet hotels, unlike industrial plants, are appreciating assets. As reflected in the Current Value statement this results in an appraisal increment of $410 million for Marriott's owned hotel assets. In 1980, Marriott operated 16,500 rooms under management agreements with an average life of 70 years and generating $45 million in operating profits that tend to rise with inflation. These agreements have no stated value on Marriott's historical cost balance sheet However, they have an estimated Current Value of $326 million. When the Current Value of Marriott's real estate assets and management agreements is reflected on its balance sheet the magnitude of the company's debt capacity becomes more apparent Moreover, the failure to recognize the highly liquid nature of Marriott's hotels understates the company's potential investment capacity. The company has sold over $300 million of its hotels over the past six years, retaining favorable contracts to operate the properties. Hotel sales provided the principal funding source for the stock repurchases. Discretionary Cash Flow The historical focus of common stock investors upon reported net income and earnings per share rather than the cash flow earnings stream distorts common stock valuation. This is particularly true for a company like Marriott that has real estate-based assets compared with industrial, retail, or service companies. To value Marriott properly, the investor must understand the full magnitude of its economic profit as well as its anticipated future earnings stream. Marriott's Discretionary Cash Flow —or economic profit—was $ 125 million in 1980 compared to $72 million reported earnings, a proportionate difference that has been rather consistent over the past decade. This difference is largely a function of the real estate nature of the company's assets: 1. Marriott spends approximately half its annual depreciation charge to maintain "plant", while industrial companies are frequently required to spend significantly more than their depreciation. Depreciation expense tends to overstate the cost of operating Marriott's businesses and understates that of industrial companies. This is the major reason Marriott's reported net income understates economic profit 21 |