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Hotel Chain's Transformation Continues

The company is morphing from a domestic to global player as it builds its presence in China.
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At a conference Tuesday, the management of Starwood (HOT) was positive about the hotel chain's positioning in the industry, with continued strength in corporate demand (75% of its business mix), limited supply growth (just 1% vs. a 2.5% historical average and little to none until 2014) and possible future asset sales.

Since 2000, the company has transformed itself from a domestic player (70% of its revenues inside the U.S.) to a global player (now 60% is outside the U.S.). It has focused on increasing its management fees, which now account for three-quarters of its top-line revenue -- which means less cyclicality than in the past. Starwood ultimately believes it will get 80% of its profit outside the U.S. and 20% in the U.S. -- and that mix will not only help revenue growth, but margins as well.

Starwood's strong international pipeline diversifies the company away from the U.S. consumer and, just today, it announced an additional seven projects in China (it has a total of 70 hotels currently in this market with 90 in the pipeline). It is a market in need of more luxury brand hotels as corporate travel increases and in one of the fastest-growing regions in the world (last year China grew 71%).

The company also reiterated its earnings guidance, and said that margin expansion continues in the company's portfolio due to continued rate growth and price increases (mainly in urban and luxury properties). In 2007, the company posted a peak EBITDA margin of 25.7% -- which fell to 18.1% in 2010 -- so there is potentially more incremental profit and margin growth going forward. SG&A is down $100 million from peak levels, and management believes 80% of those cost savings will be sustainable.

On asset sales, the company continues to explore all of its properties with a plan of getting "asset light," as it did with the most recent asset sales -- W Chicago City Center ($350 million) and Westin Gaslamp San Diego ($300 million), for example. Asked whether the economic "soft patch" has been felt at the company, management responded that corporate profitability is more an important correlation to their sales given that 75% of their customers are business travelers. Profits remain solid.

I added to this position earlier in the week and will continue to buy under $51 a share.

Regards,

Jim Cramer, Stephanie Link, and the Research Team

DISCLOSURE: At the time of publication, Cramer was long HOT.

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James J. Cramer is a Markets Commentator for TheStreet and CNBC, as well as co-founder of TheStreet. TheStreet is a publisher. Cramer graduated magna cum laude from Harvard College, where he was president of The Harvard Crimson. After receiving his J.D. in 1984 from Harvard Law School, he joined Goldman Sachs, where he worked in sales and trading. In 1987, he left Goldman to start his own hedge fund. While he worked at his fund, Cramer helped start Smart Money for Dow Jones and then, in 1996, he founded TheStreet.com.

Stephanie Link is the director of research & vice president of strategy for TheStreet. She is the co-portfolio manager for Action Alerts PLUS and works daily on the strategy and stock picks chosen for the portfolio. Stephanie is also responsible for recruiting talent for the paid sites including options, technicians and fundamental contributors. Prior to joining TheStreet, Link worked on Wall Street for 16 years. She spent nine years at the Prudential Equity Group as a managing director in U.S. institutional sales and as the New York sales manager covering top national accounts. She was the managing director of equity research in her final year at the firm. Prior to that position, she worked at Dean Witter as an institutional sales person for six years. Link's investment specialties include large-cap core stocks as well as value ideas.