ZARA ALI , CORY CARLSON, DANIELLA COMITO & EMMA HEBBLETHWAITE

Valuation

AGENDA

Company Overview Industry Overview

CompetitorsValue DriversRisk AnalysisRatio Analysis

Dividend Discount ModelFree Cash Flow Model

Valuation Using MultiplesRecommendation

COMPANY OVERVIEW

Founded in 1969Headquarters: Stamford Connecticut 1,162 Properties100 Different Countries171,000 Employees9 Brands

St. Regis, The Luxury Collection, W Hotels, Westing, Le Meridien, Sheraton, Four Points, Aloft & Element

SWOT ANALYSIS

Strengths

• Nine unique brands• Brand loyalty• World’s most award-winning

loyalty program

Weaknesses

• Not a strong global presence• Economy has customers

reducing their spending

Opportunities

• Digitalized media as a new source of revenue

• Economy has customers looking for packages

• Vacation ownership is a growing market

Threats

• Highly competitive industry• Is affected by many different

economies

INDUSTRY OVERVIEW

Lodging Industry Service Sector

Mature Industry

Delivers Specialized Services to Customers

8 Hotel Classifications Commercial, Airport, Conference, Economy, All-Suite,

Residential, Casino & Resort

INDUSTRY TRENDS

Booking Room Process Internet

Additional Luxury Furniture, Complimentary Breakfast, WIFI

Smoke-Free

“Destination” Theme Decor

TOP COMPETITOR

Marriot International

Net Income: $571 Billion

3,800 Properties

74 Countries

7 Brands

Other Top Competitor: Hyatt Hotels Corporation

VALUE DRIVERS

Award Winning Loyalty Program Increases Brand Loyalty Increases Customer Experience

Many Locations Wide Customer Base

Element Brand First LEED-certified Hotel Brand Environmentally Friendly is a Growing Trend

RISK ANALYSIS

Data Breach Identity Theft Loss of Credibility Costly Recover

Identify Areas of Exposure Risk Management Program

Industry High Competition

Geographical & Brand Diversification Loyalty Program

RISK ANALYSIS CONTINUED

Staff Poached by Competitors High Training Costs

Economy in Recovery

Tax & Law/Regulation Higher Tax & Higher Regulation Increase Costs

Currently No Government Talk

FINANCIAL RATIO ANALYSIS

Liquidity 2012 2011 2010 Industry

Current Ratio 0.95 1.27 1.21  1.16

Quick Ratio 0.27 0.26 0.25  1.05

Asset Management 2012 2011 2010 Industry

Inventory Turnover 6.52 2.42 2.24  14.78

Days sale outstanding 55.98 150.82 162.95  24.7

Total Asset Turnover 0.71 .59 0.52  0.24

• Reduced Ability to Pay Current Debt• Highly Dependent on their Inventory to cover

Debt

• High Volume of Sales• Reduced Time it takes to Receive Cash• Asset Efficiency has Increased

FINANCIAL RATIOS CONTINUED

Debt Management 2012 2011 2010 Industry

Total Debt Ratio 65% 69% 75%  46.6%

Times Interest Earned 5.24 3.15 2.39  11.79

Profitability Ratios 2012 2011 2010 Industry

Profit Margin 8.89% 8.69% 9.41%  6.6%

Return on Total Assets 6.34% 5.12% 4.88%  1.08%

Return on Equity 17.92% 16.55% 19.30%  2.53%

• Less Dependent on Creditors• Increased Ability to Pay Interest

• $0.09 of Net Income per Dollar of Sales• $0.06 of Net Income per Dollar of Assets• ROE Dominates the Industry

FINANCIAL RATIOS CONTINUED

Market Value Ratios 2012 2011 2010 Industry

Price/Earnings ratio 19.70 17.71 19.30  33.18

Market/Book Ratio 3.75 2.94 3.29  2.23

• Investors Willing to Pay $19.70 per Dollar of Profits• Industry is Higher

• $3.75 per Book Value of Shares• Higher than Industry

BETA

Regression: 2.33601704 Chose to Use this as our Beta

Yahoo! Finance: 1.91

Google Finance: 2.33

MSN Money:2.13

Conclusion: Twice as Risky as the Market

CAPITAL ASSET PRICING MODEL

Cost of Equity Capital = rf + (rm – rf) β

rf = 30 Year Treasury Bond Rate = 3.65% Use Treasury Bond because Firm may have Unlimited

LifeMarket Risk Premium = 2%

Low Risk/Mature Industry

Ri = 3.65% + (2%) * 2.33 = 8.31%

DDM Non-Constant Growth - Using 11.11%Horizon Year

r = 8.31%0 1 2 3 4 5 6

g= 11.11% g=11.11% g=11.11% g=11.11% g=11.11% g=11.11% g= 2.2%

D0 = $1.35D1 = D0 (1+g) = $1.35 (1.1111) = $1.50D2 = D1 (1+ g) = $1.50 (1.1111) = $1.67D3 = D2 (1+g) = $1.67 (1.1111) = $1.86D4 = D3 (1+g) = $1.86 (1.1111) = $2.07D5 = D4 (1+g) = $2.07 (1.1111) = $2.30D6 = D5 (1 + g) = $2.30 (1.022) = $2.35

P5 = D6r-g

P5 = 2.35/ 8.31% -2.2%P5 = $38.46

CF0 = 0CF1 = 1.50CF2 = 1.67CF3 = 1.86CF4 = 2.07CF5 = (2.30 + 38.46) = 40.76NPV = $33.12

• Uses Growth Percentage From Plow Back Equation

• Chose to Use this DDM

DDM Non-Constant Growth - Using 6.79%Horizon Year

r = 8.31%0 1 2 3 4 5 6

g= 6.79% g= 6.79% g= 6.79% g= 6.79% g= 6.79% g=11.11% g= 2.2%

D0 = $1.35D1 = D0 (1+g) = $1.35 (1.0679) = $1.44D2 = D1 (1+ g) = $1.44 (1.0679) = $1.54D3 = D2 (1+g) = $1.54 (1.0679) = $1.64D4 = D3 (1+g) = $1.64 (1.0679) = $1.75D5 = D4 (1+g) = $1.75 (1.0679) = $1.87D6 = D5 (1 + g) = $1.87 (1.022) = $1.91

P5 = D6r-g

P5 = 1.91/ 8.31% -2.2%P5 = $31.26

CF0 = 0CF1 = 1.44CF2 = 1.54CF3 = 1.64CF4 = 1.75CF5 = (1.87 + 31.26) = 33.13NPV = $27.43

• Uses Growth Estimated By Historical Dividend Growth

• This DDM shows Sensitivity

PROJECTED UNLEVERED FREE CASH FLOW

Fiscal Year 2012 2013 2014 2015 2016 2017

Net Income 2,294,462.80

2,356,458.39

2,646,526.78

2,970,388.13

3,331,979.33

3,735,695.90

Depreciation & Amortization 170,000

242,774.44

271,057.66

302,635.88

337,892.96

377,257.49

Total Other Non-Cash Adjustments

113,145.90

126,327.40

141,044.54

157,476.23

175,822.21

196,305.50

Net Operating Cash Flow 2,577,608.70

2,725,560.23

3,058,628.98

3,430,500.24

3,845,694.50

4,309,258.89

Capital Expenditures

$(1,034,136.61)

$(1,093,494.76)

$(1,227,121.95)

$(1,376,316.69)

$(1,542,892.63)

$(1,728,874.67)

Other Investments $ (809,626.89)

$ (856,098.47)

$ (960,715.36)

$(1,077,520.12)

$(1,207,932.64)

$(1,353,538.22)

Net Cash Flow from Operating Activities

$(1,843,763.50)

$(1,949,593.23)

$(2,187,837.31)

$(2,453,836.82)

$(2,750,825.27)

$(3,082,412.88)

Interest Expense 170,000 170,000 170,000 170,000 170,000 170,000

Levered Free Cash Flow 4,591,372.20

4,845,153.46

5,416,466.28

6,054,337.05

6,766,519.77

7,561,671.77

Tax Shield 36,601 36,601 36,601

36,601

36,601 36,601

Unlevered Free Cash Flow 4,554,771.20

4,808,552.46

5,379,865.28

6,017,736.05

6,729,918.77

7,525,070.77

WEIGHT AVERAGE COST OF CAPITAL

Cost of Equity

Cost of Debt

Debt to Value

Equity to Value

WACC Terminal WACC

8.31% 4.45% 50.15% 49.85% 5.59% 4.27%

Years 1 2 3 4 5 6

Unlevered Free Cash Flow

4,554,771

4,808,552

5,379,865

6,017,736

6,729,919 7,525,071

Terminal Value         363,530,000  

• Cost of Debt=Treasury Yield (3.65%)+ BBB Credit Rating (0.80%)

• Equity to Value=Market Value of Equity ÷ Total Value of Debt & Equity

($14,146,843,700) ÷ ($28,376,843,700)

• Stabilize after 5 Years to Constant Growth of 2.2%

• Terminal Value = 7,525,071 ÷ (.047 - .022) = 363,530,000 Year 6 CF ÷ (Terminal WACC – Constant Growth Rate)

FREE CASH FLOW VALUATION

CF0=0

CF1=4,554,771

CF2=4,808,552

CF3=5,379,865

CF4=6,017,736

CF5=6,729,919+363,530,000

Terminal WACC=4.27

NPV=319,034,417

1. Value the Firm

Firm Value (+) Cash & Marketable Securities

(-) Long Term Debt

Equity Value

$319,034,417

$463,000 $3,695,000 $35,802,417

2. Find Value of Equity

3. Value Stock Price

Equity Value ($35,802,417) ÷ # of Diluted Outstanding Shares (194,000,000)

= $184.55

VALUATION USING MULTIPLES

EPS: 3.3

Industry P/E: 25.98 Found by Averaging 12 Competitors

Marriott P/E: 22 Very Close to Industry

Stock Price = $85.73 Market Price = $73.87 Undervalued by $11.86

CONCLUSION

Valuation Method Stock Price

P/E Ratio $85.73

DDM $33.12

FCF $184.55

Weighted Average $104.21

20% P/ELess Accurate

Simple

40% DDMCredible

40% FCFIn Depth Analysis

RECOMMENDATION

Current Trading Price = $73.87

Intrinsic Value = $104.21

Undervalued by $30.34

Recommendation = Buy!

THANK YOU!