Is Marriot a FinTech?

Is Marriot a FinTech?

Yes, it is on the way indeed. When you consider the amount of cash it holds on its balance sheet and the financial transactions with customers!

So let’s take a deeper dive into Marriot!

A Financial Analysis of Marriot International Inc. 

A Financial Analysis of Marriot International Inc. 

1. BRIEF INTRODUCTION ………………………………………………………………………………….3 1.1. Marriot International Inc………………………………………………………………………….. 3 1.2. Benchmark Company: Wyndham Hotels & Resorts ……………………………………. 4 

2. MARRIOT’S PROFITABILITY FROM 2018-2020………………………………………………..5 2.1. Marriot’s Decreasing Profitability (2018-2020) and Possible Causes…………….. 5 2.2. Marriot’s Decreasing Profitability Causes………………………………………………….. 5 

3. MARRIOT’S FINANCIAL PERFORMANCE BASED ON THE DUPONT IDENTITY……….7 3.1. Marriot’s Unhealthy Financial Performance……………………………………………….. 7 3.2. Wyndham’s Safer Financial Performance ………………………………………………….. 8 

4. MARRIOT’S FINANCIAL PERFORMANCE UNDER THE SOLVENCY RATIOS…………..9 5. MARRIOT’S MARKET VALUE FROM 2018 TO 2020 (MAR VS. THE S&P500) ……10 6. MAIN CONCLUSIONS AND FINAL RECOMMENDATION …………………………………….12 

EXHIBITS……………………………………………………………………………………………………….12 Exhibit 1 – Marriot’s Common-Size Income Statements (2018-2020)………………… 12 Exhibit 2a – Marriot’s Common-Size Balance Sheets (2018-2020) ……………………. 13 Exhibit 2b – Marriot’s Current Liabilities Breakdown………………………………………. 13 Exhibit 3 – Wyndham Common-Size Income Statement…………………………………… 14 Exhibit 4 – Wyndham Common-Size Balance Sheet………………………………………… 15 Exhibit 5 – Marriot’s SEC 10-K Extract (“Risks Related to Liquidity”)……………… 16

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1. BRIEF INTRODUCTION 

1.1. Marriot International Inc. 

Marriot International Inc. is an American multinational cany, headquartered in  Bethesda, Maryland, founded by J. Willard and Alice Marriott. They started in 1927 as a root  beer stand under the A&W franchise¹. Marriott International, Inc. was formed in 1993 when  Marriott Corporation split into two companies: a) Marriott International, Inc. (Nasdaq: MAR),  which franchises and manages properties, object of our current analysis; and b) Host Hotels  & Resorts (Nasdaq: HST), which owns properties, but will not be analyzed here. Marriott holds 

30 brands in four categories: Luxury, Premium, Select, and Longer Stays. Marriott is the largest hotel chain globally with the number of available rooms. These  with 7,642 properties containing 1,423,044 rooms in 131 countries and territories, according  to its 2020 SEC 10K²: 

¹ A&W Restaurants was the first franchise US restaurant chain in founded by Roy Allen and Frank Wright  (that’s the A&W) in 1919. 

² MARRIOT International Inc. SEC Form 10-K for the fiscal year ended December 31^st, 2020: https://www.sec.gov/ix?doc=/Archives/edgar/data/0001048286/000162828021002433/mar-20201231.htm

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A Financial Analysis of Marriot International Inc. 

Of these 7,642 properties, Marriot operates 2,149 properties and franchisees operate  5,493 properties.³ 

Marriott is a publicly held company, traded in Nasdaq under the symbol MAR for its  Class A shares, also known as common stock, which have the typical one-share-one-vote  structure. There were 324,414,150 shares of Class A Common Stock, par value $0.01 per share,  outstanding on February 10, 2021. It is a NASDAQ-100 component and an S&P 500  component. Notwithstanding considerations of different nature such as Corporate Social  Responsibility or Public Reputation, we have analyzed Marriot’s performance from 2018 to  2020⁴ strictly from a financial perspective. I have chosen MAR because I have enjoyed its  excellent services, and this was a perfect opportunity to study this industry. 

1.2. Benchmark Company: Wyndham Hotels & Resorts 

For comparison purposes, I have elected Wyndham Hotels & Resorts because, in its  10-K5, it describes itself as the largest hotel franchisor in the world, with 9,280 locations,  following a business model like Marriot’s.  

Wyndham has a portfolio of 20 hotel brands, including Baymont, Days Inn, Howard  Johnson, La Quinta, Ramada, Super 8, Travelodge, and Wyndham. Finally, Wyndham is also  a publicly held company traded in the NYSE under the symbol of WH. 

³ MARRIOT International Inc. SEC Form 10-K for the fiscal year ended December 31^st, 2020: https://www.sec.gov/ix?doc=/Archives/edgar/data/0001048286/000162828021002433/mar-20201231.htm 

⁴ Exhibits 1 (Marriott’s Common-size Balance Statement) and 2 (Marriott’s Common-size Income Statement) 

⁵ Exhibits 3 (Wyndham’s Common-size Balance Statement) and 4 (Wyndham’s Common-size Income  Statement).

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Wyndham is authorized to issue a total of 606 million shares of capital stock consisting  of: a) 600 million shares of common stock, par value $0.01 per share; and b) 6 million shares  of preferred stock, par value $0.01 per share. 

2. MARRIOT’S PROFITABILITY FROM 2018-2020 

Considering the differences in size between Marriot and Wyndham, a direct nominal  comparison would be impossible and not helpful. For this task, we need to standardize their  financial statements by working with percentages instead of total dollars, the so-called  common-size statements.⁶ In the common-size Balance Sheet, we will work with percentages  of assets. In the common-size Income Statement, we will work with percentages of  sales/revenues. 

2.1. Marriot’s Decreasing Profitability (2018-2020) and Possible Causes 

Going straight to the profitability (net income/revenue) shown in the green chart and  the green bottom-line, we can observe that from 2018 to 2020, Marriot’s profitability decreased  from positive 9.19% in 2018 to negative 2.53% in 2020: 

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Was this decreasing profitability only due to the Covid-19 pandemic? At first glance,  we could say that because the 2020 revenues ($10.5 Million) were approximately 50% of the  2019 revenues ($20.9 Million) and 2018 revenues ($20.7 Million), we could conclude that the  Covid-19 pandemic was the leading cause for such decreasing profitability. 

2.2. Marriot’s Decreasing Profitability Causes 

However, considering that profits derive not only from the revenues management but  also from the cost/expenses management, and considering the proportionality of such costs and  

⁶ ROSS, Stephen; Ross, Stephen. Corporate Finance. McGraw-Hill Higher Education. Kindle Edition, p. 141. 

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A Financial Analysis of Marriot International Inc. 

revenues in relation to revenues, let us check Marriott’s performance in the common-size  income statement (results in the reversed order from 2020 to 2018) and following chart: 

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In 2019 – so before the pandemic – the common-size income statement shows that: a) Marriot’s costs in 2019 had already risen from 82.30% to 84.66%, an increase of 2.3% in  proportion to different revenues. 

b) Marriot’s expenses in 2019 rose from 6.30% to 6.76%, an increase of 0.46% in proportion  to different revenues. 

Still observing above the same chart and common-size income statement, in 2020 – so  during the pandemic – we see that: 

a) although Marriot made a large cut of nominal costs by 48,67% (from $17.7Bi in 2019 to  $9.1Bi in 2020), in proportion to revenues, its costs rose by 1.54% of sales, confirming the  previous trend of increasing costs. 

b) although Marriot made a large cut of nominal expenses (13.1% of sales), its team was unable  to reach the 2019 levels (6.76% of sales), so that in proportion to revenues, Marriott’s expenses also rose by 6.34% of sales. 

Hilton.com

Douglas Yamashita 

Now let us compare these Marriot’s profitability to Wyndham profitability, based on  their common-size income statement (Exhibits 1 and 3): 

Using Wyndham as a benchmark, its common-size income statement shows that while  Marriot’s profitability was almost the same as Wyndham, it was low for 2019, confirming our  conclusion that Marriot’s cost management in 2019 was not excellent. On the other hand, we  must consider that, despite its negative profitability of 2.53% in 2020, Marriot’s team did a  much better job than Wyndham, which registered negative profitability of 10.15%. 

Therefore, although the Covid-19 pandemic was one factor in Marriot’s decreasing  profitability, cost management was another critical factor in such a negative trend. And  Marriot’s profitability has been not only low (4% on average) but also in a decreasing trend. 

3. MARRIOT’S FINANCIAL PERFORMANCE BASED ON THE DUPONT IDENTITY 

While the return on Equity (ROE) measures a company’s profitability in  relation to stockholders’ investment (Equity), the DuPont identity discloses the reasons for  such (low or high) profitability. So, while ROE = Net Income divided by equity, the DuPont  identity reveals that ROE = Profit margin × Total asset turnover × Equity multiplier, enabling  us to make a deeper analysis of the return on Equity (ROE). While the profit margin measures  operating efficiency, the total asset turnover measures asset use efficiency, and the equity  multiplier measures financial leverage. 

3.1. Marriot’s Unhealthy Financial Performance  

Let us now examine how Marriott did under the DuPont identity: 

Considering Marriott’s low average profitability of 4%, its operating efficiency is low. Moreover, since for every dollar in assets, Marriot gets an average return of $0.71 (total asset  turnover), we can see that Marriot’s asset use efficiency was outstanding. In the balance sheets  (Exhibit 2), we can see that while Marriott’s fixed assets are only 11.5% of its total assets, its  goodwill and intangible assets comprise 70% of its total assets. This high percentage  demonstrates how Marriott’s business model works: it makes money mainly through revenues  such as franchise fees or license fees based on third-party properties.

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A Financial Analysis of Marriot International Inc. 

Last but not least, Marriott’s equity multiplier has called our attention for two reasons:  1) in 2018, its high equity multiplier of 10.6 already meant that Marriott’s assets were ten times  its equity; 2) Marriott’s equity multiplier has increased fivefold from 10.6 to 57.4, a level of  financial leverage that is considered dangerous if in case, they are unable to repay the debts,  it might lead to difficulties in getting new lenders in future, credit rating downgrade and higher  interests due, especially in Covid times. And Marriot’s managers tend to agree with our analysis 

in the 10-K (Exhibit 5). This trend can be seen in the proportion of liabilities and Equity in  Marriot’s balance sheets (Exhibit 2) and the following pie charts: 

While Marriott’s Equity has decreased from 9.3% to 1.7% of assets, its liabilities have  

increased from 90.7% to 98.3% of assets. According to its 2020 10-K⁷, Marriott has been  repurchasing its stocks by taking more debt, probably because interests are tax-deductible, and  dividends are not. To some extent, Marriot seems to be following Modigliani Miller’s Proposition 1 (with corporate tax), according to which the firm value increases with leverage.⁸ However, at the cost of whom and which risk? 

3.2. Wyndham’s Safer Financial Performance 

Let us then compare Marriot to Wyndham, still based on the under the DuPont identity: 

Considering Wyndham’s low profitability of 2% on average, its operating efficiency is  low. Here Marriot was a bit better. Since for every dollar in assets, Wyndham gets an average  return of $0.37 (total asset turnover), we can see that Wyndham’s asset use efficiency was  regular. Here Marriot was a lot better. However, in absolute contrast with Marriot’s unhealthy  

⁷ Marriot International Inc., 2020 SEC 10-K, p. 35 (see footnote 2). 

⁸ ROSS, Stephen; Ross, Stephen. Corporate Finance. McGraw-Hill Higher Education. Kindle Edition, p. 875.

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equity multiplier of 57.4 in 2020, Wyndham’s equity multiplier of 4.82 in the same year shows  a much safer way to operate hotel franchises. We can also observe that from 2018 to 2020, Wyndham’s average equity multiplier has increased 0.4 times instead of 5 times for Marriot. 

4. MARRIOT’S FINANCIAL PERFORMANCE UNDER THE SOLVENCY RATIOS Let us turn to the following financial ratios to examine Marriot’s economic performance. 

The first short-term  

solvency ratio we see to the right,  

the current ratio, is below 1,  

meaning that Marriott’s current  

assets are much lower than its current liabilities, in a proportion of only 1 dollar of current  assets for every 2 dollars of current liabilities. In other words, we verify that Marriott’s net  working capital has been negative throughout all researched years (2018-2020). As a  benchmark, in the same period, Wyndham registered only current ratios above 1, reaching a  current ratio of only 2.6 in 2020! Nevertheless, it is noteworthy that Marriot’s cash ratio has  risen from 3% in 2019 to 15% in 2020, meaning that there is $0.15 of cash for every 1 dollar of current liabilities. 

While this low short-term liquidity seems terrible, Marriott’s 2020 10-K⁹ acknowledges  its negative working capital, claiming that: “We have significant borrowing capacity under our  Credit Facility should we need additional working capital.” In fact, Marriott: a) has “zero” Inventory for being a service company, so that its current assets are highly liquid;  b) had negative net cash flows in 2018 and 2019 but registered a positive cash flow of $641 Million in 2020, i.e., during Covid-19 pandemic: 

Period Ending: 2018 2019 2020 

However, considering that Marriott’s total current liabilities in 2020 were $5.7 billion,  $0.641 billion (11.2%) might not be much. But above all this, something very peculiar can be  observed when we break down Marriot’s 2020 Total Current Liabilities of $5.7 billion in the  following pie chart. 

⁹ Marriot International Inc., 2020 SEC 10-K, p. 35.

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A Financial Analysis of Marriot International Inc. 

In this pie chart, on the one hand, notice that  

30.75% of Marriot’s current liabilities in 2020  

refer to the “Liability for guest loyalty program” 

(in yellow), which often expires before  

enforced by clients. And this liability has  

decreased from $2.52 Billion in 2018 to $2.25 

Billion in 2019 to the level of $1.7Bi in 2020  

(Exhibit 2b). 

Observe in the pie chart that another 14.45% of Marriott’s “Accrued payroll and  benefits,” which is not due to the Covid-19 pandemic, because such payroll liability was $1.3 Billion in 2019 and $0.9 Billion in 2018. Could this mean that the Marriot’s employees are  suffering at least some moratory of their labor rights? Nothing the 10-K refers to this current  payroll liability. 

The second solvency ratios refer to  

long-term solvency. Based on the ultra 

high debt ratios and debt-equity ratios  

above, it’s clear that Marriott’s operations are also financed by long-term third-party loans and  not by shareholders’ capital. This does not reduce the high risks Marriot is taking in case  creditors become skeptical. Marriot’s managers tend to agree with our analysis in the 10-K  (Exhibit 5). 

5. MARRIOT’S MARKET VALUE FROM 2018 TO 2020 (MAR VS. THE S&P500)

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As we can observe in. the  chart aside, from 2018-2020,  Marriott’s Stocks (MAR) have  registered high volatility similar to the  S&P500. 

Marriott Stocks’ Beta  (concerning the SP&P500 from 2008- 2020) was 1.067, i.e., MAR’s price  tends to move with the market. 

Earnings per share (EPS):  decreased from $5.39 (2018) to $0.82  (2020). As of September 2021,  MAR’s EPS was $1.92. Since the  payment of dividends has been 

suspended since March 2020, a  valuation of Marriot based on a  dividend discount model was not  feasible. 

As of October 2021, MAR’s price reached $160, superseding its  pre-Covid price of $150 (6% gain  over 18 months). 

$160  $150  $140  $130  $120  $110  $100  

$90  $80  $70  $60  $50  $40  $30  $20  $10  $0  

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 

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Marriott’s Intl’ Stock’s Quotes  (2018-2020) 

S&P500 

S&P500

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A Financial Analysis of Marriot International Inc. 

6. MAIN CONCLUSIONS AND FINAL RECOMMENDATION 

In conclusion, we have seen that from 2018 to 2020: 

a) Marriott’s profitability is low (4% on average) and has been decreasing. b) Marriott’s financial leverage is not only ultra-high (equity multiplier of 57.4 in 2020) but  also has increased five (5) times. We saw Wyndham’s equity multiplier in 2020 was only  4.8 and has increased only 0.4 times. 

c) Marriott has been presenting a persistent negative working capital (current ratio of 0.5). d) Marriott’s hospitality industry is very vulnerable to the Covid ($267 million loss in 2020),  of which travel restrictions will recede very slowly at an uncertain pace. 

Therefore, I would not recommend buying MAR stocks. 

EXHIBITS 

Exhibit 1 – Marriot’s Common-Size Income Statements (2018-2020)

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Exhibit 2a – Marriot’s Common-Size Balance Sheets (2018-2020) 

Exhibit 2b – Marriot’s Current Liabilities Breakdown

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A Financial Analysis of Marriot International Inc. 

Exhibit 3 – Wyndham Common-Size Income Statement

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Exhibit 4 – Wyndham Common-Size Balance Sheet

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A Financial Analysis of Marriot International Inc. 

Exhibit 5 – Marriot’s SEC 10-K Extract (“Risks Related to Liquidity”) 

“Item 1A. Risk Factors. […]  

Risks Relating to COVID-19. COVID-19 has had a material detrimental impact  on our business and financial results, and such impact could continue and may  worsen for an unknown period of time. […] COVID-19 has subjected our  business, operations and financial condition to a number of risks, including, but  not limited to, those discussed below: […] 

• Risks Related to Liquidity: In 2020, we made significant borrowings under  our $4.5 billion Credit Facility and completed offerings of $3.6 billion  aggregate principal amount of senior notes to preserve financial flexibility in  light of the impact on global markets resulting from COVID-19. We may be  required to raise additional capital again in the future to fund our operating  expenses and repay maturing debt. In 2020, we raised $920 million of cash  through amendments to agreements with the U.S. issuers of our co-brand credit  cards associated with our Loyalty Program, and this option to raise capital will  likely not be available again to us in the near future and will reduce the amount  of cash we will receive in the future from these card issuers, which may  increase the need for us to raise additional capital from other sources. In  addition, we have seen increases in our cost of borrowing as a result of  COVID-19 and such costs may increase even further for a time we are unable  to determine. If we are required to raise additional capital, our access to and  cost of financing will depend on, among other things, conditions in the global  financing markets, the availability of sufficient amounts of financing, our  prospects, our credit ratings, and the outlook for the hotel industry as a whole.  As a result of COVID-19, credit agencies have downgraded our credit ratings.  If our credit ratings were to be further downgraded, or general market  conditions were to ascribe higher risk to our credit rating levels, our industry,  or our Company, our access to capital and the cost of debt financing will be  further negatively impacted. The interest rate we pay on many of our existing  debt instruments, including the Credit Facility and some of our senior notes, is  affected by our credit ratings. Accordingly, a downgrade may cause our cost  of borrowing to further increase. Additionally, certain of our existing  commercial agreements may require us to post or increase collateral in the  event of further downgrades. In addition, our latest amendments to our Credit  Facility increase the minimum liquidity we are required to maintain for the  duration of the waiver period as discussed in Note 10, and the terms of future  debt agreements could include more restrictive covenants, or require  incremental collateral, which may further restrict our business operations or  cause future financing to be unavailable due to our covenant restrictions then  in effect. Also, if we are unable to comply with the covenants under our Credit  Facility, the lenders under our Credit Facility will have the right to terminate  their commitments thereunder and declare the outstanding loans thereunder to  be immediately due and payable. A default under our Credit Facility could  trigger a cross-default, acceleration or other consequences under other  indebtedness, financial instruments or agreements to which we are a party.  There is no guarantee that debt financings will be available in the future to  fund our obligations, or will be available on terms consistent with our  expectations. Additionally, the impact of COVID-19 on the financial markets 

Douglas Yamashita 

is expected to adversely impact our ability to raise funds through equity  financings.”