Nashville-based hospitality company Gaylord Entertainment (NYSE:GET) reported its best second quarter in the past six years. Despite the positive news, FBR Capital downgraded its stock from outperform to market perform. I'm not sure what results they were looking at, but the results I see suggest a company on the mend. In fact, its stock is looking awfully hospitable. Here's why. (For more read Earnings: Quality Means Everything.)
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The second quarter of 2011 delivered an operating profit of $31.2 million on $236.8 million in revenue for an operating margin of 13.2%. How does this second quarter rank among the past six? It's the best operating profit and margin of the bunch and the second best in terms of revenue. Only 2008's second quarter generated higher sales, but its operating margin was 210 basis points lower. Earnings per share in Q2 2011 increased 667% on an adjusted basis (I've added back $31.3 million in 2010 from flood losses) to 17 cents a share. You'd think this would mean something to analysts. I guess not.
Most likely, they're caught up in the problems Gaylord's having with its Maryland hotel. The National's revenues were down 10.3% year-over-year, its occupancy rate dropped below 70% to 67.9% and RevPAR (revenue per available room) declined 11.7%. I can't deny these aren't great numbers, but you have to look at the entire picture. On that basis, its occupancy rate increased 1.4% and its RevPAR dropped by just 0.3%. Keep in mind I didn't mention revenues because the Gaylord Opryland was closed due to a flood between May and November 2010. It's conceivable that, had it been open for two of the three months in the quarter, its revenues and operating profits might have been equal to or higher than in 2010. Some might choose to look at this as the glass half empty. I tend to think it was a good quarter nonetheless.
Gaylord management, as part of its second quarter earnings release, suggested its consolidated cash flow (CCF) in 2011 would be between $215 million and $230 million. In 2006, that number was $161 million. While it's nice the company's grown this financial metric, more important is the fact it's grown the CCF margin in the past five years by approximately 70% to 28.9% of revenue as of the end of June. The margin increase, in turn, provides it with a greater ability to borrow. As part of its debt service agreement, its CCF must be double its interest expense for any four consecutive quarters. At the end of 2006, its long-term debt was $754 million and its interest expense on that debt was $71.7 million. Therefore, its CCF to debt service ratio was 2.25 times. Assuming similar interest rates, its borrowing capacity was $847 million, leaving it with $93 million for future use.
As of the end of the second quarter this year, its long-term debt outstanding was $1.2 billion with interest expense (annualized) of $85.5 million. Its CCF to debt service ratio is 2.5 times. Again, assuming similar interest rates, its borrowing capacity is $1.5 billion, leaving it with $300 million for future use. This means margin expansion has increased its borrowing capacity by 25%. I'm not a big fan of debt, but hotels aren't cheap. This is a meaningful improvement to its capital structure. The extra funds will come in handy should it go ahead with its resort in Mesa, Arizona. (To help you with understand cash flow, check out Analyze Cash Flow The Easy Way.)
Gaylord Entertainment and Peers
|Gaylord Entertainment (NYSE:GET)||1.0|
|Hyatt Hotels (NYSE:H)||1.1|
|Starwood Hotels & Resorts (NYSE:HOT)||2.7|
|Marriott International (NYSE:MAR)||8.1|
|Wyndham Worldwide (NYSE:WYN)||1.9|
Perhaps the best sign of all that Gaylord Entertainment might be getting its act together are the recent stock purchases by TRT Holdings. According to Investopedia's Sham Gad, Robert Rowling, owner of Omni Hotels and Gold's Gym, recently bought an additional four million shares of Gaylord to go along with the 6.3 million already held. Paying anywhere from $23 to $27 a share, Rowling is now by far its biggest shareholder with over 21% of the stock.
Fred Lowrance Jr., an analyst for Avondale Partners in Nashville, had this to say about the move: "We don't know if they're trying to buy the company, get more influence or if they want to benefit from positive trends Gaylord is to experience on the profitability front over the next few years."
I don't know about you, but I see this as good news for Gaylord shareholders. When a billionaire comes knocking, especially one that understands your business, you should want to find out why. Perhaps, as Lowrance suggests, he simply sees a hospitality company that is moving in the right direction.
Ignore the analysts and listen to the billionaire. Gaylord Entertainment is worth a lot more than its current price. (To learn more, see How Investors Can Screen For Stock Ideas.)
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