Less Stock Market Volatility with Hotel Franchisors

The housing market crisis and soaring gas prices helped make vacationers in 2008 take a "staycation", where they stay home for vacation. During such volatility, franchising hotels took less punishment in the stock market.

"Hotel companies that focus on franchising also performed better than companies that actually own the hotel properties as troubles in the real estate market exacerbated worries. . . Bethesda, Maryland-based Marriott, which owns very few of its hotels, fared somewhat better than Starwood, which was in the process of shedding real estate assets before the downturn. Marriott shares lost 46 percent, compared with shares of White Plains, New York-based Starwood, which lost 62 percent." - International Herald Tribune(IHT)

Note the difference between Marriott (MAR) and Starwood (HOT). This is a corollary to an earlier discussion about the Rosenberg Franchise 50 Index. Since Marriott makes money by franchising and managing hotels owned by franchisees, it is more insulated from the current economic downturn. On the other hand, Starwood owns many of its own properties and is doing much more poorly as a result.

IHT continues:

One of the best performing stocks in the sector was Choice Hotels International Inc., which fell just under 13 percent in 2008 compared with the much steeper drops of its rivals. The Silver Spring, Maryland-based company's revenue stream is considered more reliable because — as a hotel franchisor — it takes in a relatively stable stream of franchise fees and requires less capital spending than hotel owners.

That was after Christmas. On Friday, January 2, hotel stocks, particularly Starwood, took a jump.

"Shares of hotel companies surged on the first trading day of the new year, with Starwood Hotels & Resorts booking double digit gains after announcing it will enter into a confidentiality agreement with Sam Zell's investment company." - Associated Press

Hotel Franchising Calms Stock Market Volatility

There was a general uptick, plus an outsized uptick because of belief that Starwood (HOT) is going to get an investor to increase their stake. If you compare MAR with HOT you can see that while they track each other closely in the long term, there seems to have been a bit more volatility recently which would be logical if MAR had less exposure to the short-term economy due to predictable management and franchising fee income.

Long-term exposure appears to be very similar, as one might expect. So for patient investors, the quality of management is more of a factor in investment choice. But for traders, a company with a less predictable revenue stream is going to have more stock price volatility than a company with "locked in" revenue such as management fees.