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Hoofy's Hotel: He May Check In, but He May Not Check Out



After reading the discussion regarding Hilton Hotels' (HLT) ugly technicals, I spent a bit of time looking at the fundies of HLT's "rich uncle", Four Seasons Hotels (FS). FS shares an equally ugly chart, so if the fundies lined up, Boo might decide to pay it a visit.

Alas, the fundies are not as clear - yet. FS is almost strictly a management company for third-party owned hotels. Over the last year it has made it a point to unload, or minimize, its equity interests in a few of the properties. The key to FS success is to grow the hotels' revenue in order to benefit from "incentive fee provisions" in their management agreements, something that kicks in only after certain profitability targets are achieved. During the last 12-18 months, a period which arguably has been as good for the business travel / lodging industry, as any in recent history, FS has performed rather poorly. Despite RevPAR (Revenues Per Available Room) increases of 10% in 2004, and even greater in Q1 and Q2 of '05, FS earned incentive fees from only 35 of its 63 properties. Worse, if not for currency benefits (FS reported in Canadian dollars until recently) and the revenue from the opening of new hotels, it looks like revenue actually decreased in 2004, despite silly-easy comps from 2003 (Iraq war jitters), and occupancy rates that jumped pretty much across the world.

For one reason or another, there has not been much if any free cash flow either during 2002, 2003, 2004 or 1H of 2005, as cash from operations is rolled into properties' improvements or management bonuses. To wrap it all up, FS trades at 40+ times '05 estimates and 30x '06 estimates. And both sets of "guesses" have been heading steadily south since February.

So why isn't FS a no-brainer for Boo? For one, the stock has already taken a 30% haircut in the last 6 months. About 7% of the float is already short. With '06 estimates already drastically reduced, if FS does make $2.00 in EPS it trades at about the '06 vs. '05 growth rate. In my opinion, for the estimates to continue to be slashed RevPAR would have to be hurt by a sufficiently severe downturn in the world economy that even the least economically sensitive crowds would feel the pain. I view such scenario as likely at some point - but not just yet.

Boo needs also to be aware that he'd be going up against Prince Alwaleed, who owns 22.5% of the company. It would not be a first should the Prince decide to "average down" on his position. Bill Gates and his better half also own 4.5%, through their foundation. I am inclined to consider both positions as coming out of the "float" number for short interest purposes.

Technically, the current "bear flag" would argue for more downside, but stochastics are not helping. And longer term, FS is coming into a significant area of support, and the 50% retrace of the 2003-2005 move.

At this time, and in a non-advising way, this bear is inclined to go fishing in less murky waters.

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No positions in stocks mentioned.
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