For Subscribers

Get the complete article now!

TWST: How are you guiding investors?

Mr. Mutkoski: Let’s put it this way: back in June and July, when we were heading into the second quarter reporting season, we were encouraging investors to take profits in the group because we had seen such a strong run in this group. I believe that we were the first to waive the cautionary flag. We thought a lot of the outperformance was driven by unsustainable economic growth. And our expectations were that we would get into a period of slower growth, if not in the second half of this year, then in the first half of next year. Now we have moved into the fall, and our concerns about a sell-off in the group have played out. We are encouraging investors to remain very selective and be aware that the lodging group may move sideways a little bit here for the balance of the year and into early next year before things start to look up again.

TWST: What’s your favorite pick right now?

Mr. Mutkoski: Starwood Hotels & Resorts (NYSE:HOT) is our top pick in the lodging group. Starwood stock has had a decent year, but the company has really delivered, sustaining RevPAR growth that exceeds its peer group by several percentage points. We see this continuing for the foreseeable future, since we think Starwood is gaining market share. Beginning with the first quarter of this year, the company also began delivering impressive margin expansion, and we expect this to continue. We are seeing the benefits of the substantial renovations the company has completed on its owned Sheraton properties, which has helped reposition the brand. Sheraton has seen some impressive RevPAR growth and gains in market share. The other thing the company has done well is the rollout of Starwood Preferred Guest, a guest frequency program that has really proven to be a competitive advantage. So we are looking for Starwood to continue with that kind of momentum, outperforming its peers. And we think the market will ultimately reward the company with a better valuation. Starwood stock has pulled back a little bit on general concerns about the economy and the concerns facing the group, and is trading at only 6.5 times our 2001 EBIDTA estimate. That compares to a similar multiple for Hilton Hotels (NYSE:HLT), but 9.5 times for Marriott International (NYSE:MAR). So we think 6.5 times EBITDA is a pretty attractive valuation for a company that is gaining market share and has a lot of momentum in the business.

TWST: Is there a compelling reason to buy the stock today at the current price?

Mr. Mutkoski: We think the company will have a really solid third and fourth quarter of 2000. Our sense is that the business fundamentals for October and the first half of November in Starwood’s markets will turn out to be very good. So we think we have smooth sailing in terms of earnings performance through the balance of this year. The question is, do we have to go through a significantly slower period in the first half, and how will investors react? This is the one name that we think people ought to hold through that period given the pullback that we have already seen. We think $26-$27 is a very attractive entry point. So we would be fairly aggressive on Starwood here, maybe less aggressive if the stock got back into the $30s.