Marriott International Inc (MAR) Five Year Comparison

Something that we are looking for in a business is the ability for its earnings (really, its free cash flow available for distribution) to keep up with inflation. Over the past five years, the CPI is up 23% and the PPI is up 28%. Truflation has it as 26% since January 2020, and the price of a USPS first class stamp is up 23%. So we would like to see free cash flow per share and earnings per share meet or exceed this increase.

Earnings per share for Philip Morris were $1.54 in Q2 2024 versus $1.49 five years earlier (Q2 2019), a dreadful showing. In contrast, when we looked at Lamar Advertising in February, we compared Lamar's results for the year 2023 with those of 2018 and found that their shares outstanding grew 3% in five years, revenue grew 30%, and cash from operations grew 39%. So, Lamar's cash from operations per share went from $5.70 to $7.67, an increase of 35%. That was comfortably better than inflation. We also looked at Enterprise Products Partners (and compared it to Altria), finding that the partnership's free cash flow per unit had grown substantially (by 3.3x) from 2018 to 2023.

How about Marriott International (MAR)? One of our theories is that a "royalty-like" business (with high free cash flow margins) should easily outpace inflation. Let's look at free cash flow per share for the first half of 2024 vs 2019. Note that in our FCF calculation, we subtract the stock based compensation (SBC) that is customarily added back. (Marriott's SBC is not quite 1% of revenue, compared with 3% at Apple and 9% at Facebook.)

We find that Marriott generated $4.30 of free cash flow per share (again, excluding SBC) during the first half 2024 versus $1.43 during the first half of 2019. That's a 3x increase in five years. How did it happen?

We start by decomposing the change in FCF per share into: the change in shares * the change in revenue * the change in FCF margin. The company bought back 14.4% of its shares over the past five years, which increased the FCF per share ceteris paribus by a multiple of 1.17. Then, revenue increased 20% from $10.3 billion to $12.4 billion. And then, most importantly, the free cash flow margin increased from 4.6% of revenue to 9.8% of revenue, a 2.13x increase. (You can check: 1.17 * 1.2 * 2.13 = 3x.)

So more than 2/3 of the increase in FCF per share was from increased FCF margin. We do some initial calculations and find that capex remained at about 2% of revenue and stock compensation remained at about 1% of revenue; neither of those were the cause. Nor was there a meaningful change in working capital as a percentage of revenue.

However, we do see that cash expenses as a percentage of revenue dropped from 90% to 83%. That's what drove most of the increase in FCF per share. How did it happen?

For one thing, Marriott overhead went from $451 million the first half of 2019 to $509 million the first half of 2024 (+13%) while the number of rooms increased 23% and total revenue increased 20%. So part of the story here is operating leverage and growth. Overhead per room fell from $335 for the first half of 2019 to $307 the first half of 2024 (-8%). Not many companies are able to keep their SG&A costs below inflation. And the overhead per room falling means they are realizing economies of scale as they grow.

Something else that was a significant help was that in the first half of 2019, Marriott's cost reimbursements were less than its reimbursable expenses by $340 million, while the first half of 2024, the reimbursements have been $15 million ahead of the expenses. That difference of $355 million is 2.9% of revenue, which explains a significant chunk of the difference in FCF margin. 

There was a data security incident involving unauthorized access to the Starwood reservations database. Marriott recorded $124 (net) of expenses having to do with this incident, some (but not all) of which were recorded in reimbursed expenses.

Another help was in Marriott's owned/leased (as opposed to managed and franchised/licensed) properties, where profitability improved from $137 million to $170 million even as total revenue fell. Marriott went from having 63 properties and 17,101 rooms that were owned or leased (1.3% of rooms) to owning/leasing only 50 properties with 13,110 rooms (0.8% of rooms).

We would not expect Marriott to be able to increase free cash flow margin at the same rate that it did over the past five years. But we would expect the unit count to continue to grow, and for revenue to grow faster than inflation (because of unit growth), and for free cash flow to grow faster than revenue (because of operating leverage). 

Interestingly, there has been significant multiple contraction in Marriott shares over the past five years. When FCF/share was $1.43, shares traded for $127 (44x). Now they trade for 28x the first half of 2024's free cash flow. That's a multiple contraction of 36%.