Cramer: Telling the Good Stocks from the Bad
"Companies are not interchangeable," Cramer said Thursday. "Their stocks shouldn’t be either."
Take hotel operator Marriott International , for example. On Monday, it said weakness in North America could cause its revenue per room to rise by 7 percent in the first quarter, which is at the low-end of its previous guidance. A closely-watched industry metric, the pre-announcement sent Marriott shares down 6 percent while the averages remained mostly flat. While that move made sense, Cramer was surprised to see Starwood Hotel & Resorts Worldwide's stock fall, too.
"Starwood was down just as much as Marriott, but they're not the ones who pre-announced to the downside," Cramer complained. "The market treated these stocks like they're exactly the same when anyone can see Starwood is the better company."
Starwood operates hotels and resorts under the brand names of St. Regis, The Luxury Collection, W, Westin, Le Meridien, Sheraton, Four Points, Aloft and Element. Compared to Marriott, it's a "superior competitor" and worth investing in, Cramer said.
While Marriott reported the North American lodging business is weak, it also noted international markets are strong. Marriott's international revenue per room is expected to increase by 11 percent in the first quarter, which is greater than the 5 to 6 percent growth it expects to see domestically. The problem is it only gets 30 percent of sales from overseas, Cramer said. Starwood, on the other hand, gets roughly half of its profits from outside the U.S. More than 80 percent of Starwood's pipeline is in international and the majority is in Asia. In recent conference calls, Starwood executives have called attention to opportunities in international markets. As billions of people in the developing world move out of poverty, Cramer said there's increased demand for hotel rooms. More people have money to take vacation, for example, or need to travel on business.
Another reason to own Starwood over Marriott, Cramer said, is that it's a smaller company. Starwood has more room to grow. It's also changing its business model from being an owner of hotels to managing hotels, which is a much higher-margin business. In 2000, Starwood owned 70 percent of it properties it runs. It owns just 25 percent today. Franchising is a better way to run a business, Cramer said, because it costs less to sell a franchise than it does to build a new hotel from the ground up. Marriott won't experience any of this kind of upside because it's nearly all franchised already.
Starwood reported a strong quarter when it released results in February, posting a 13 cent earnings beat off a 39 cent basis with double-digit growth in Asia and Latin America. Yet when its debt levels are taken into account, Starwood and Marriott are valued about the same. Cramer thinks that's crazy.
Starwood is a much better business with stronger brands and international exposure, Cramer said. He recommends investors buy HOT, but leave Marriott in the "Sell Block."
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