On Tuesday, Compass Point adjusted its stance on Sunstone Hotel Investors (NYSE:SHO) stock, shifting the rating from Sell to Neutral and increasing the price target to $12.00, up from the previous $10.00.
This revision followed the company's reported results, which surpassed both the analyst's projections and the consensus. In response to these outcomes, management has revised its 2024 outlook upward, taking into account the recent acquisition of the Hyatt Regency San Antonio Riverwalk.
The upgrade also considers the anticipated stabilization of capital projects and the potential contributions from three of the company's properties: Andaz Miami Beach, Westin Downtown Washington DC, and Marriott Long Beach. These are expected to enhance the company's financial distribution in 2025.
Despite the underperformance of its wine country assets, Sunstone's top three hotels generated over 70% of the portfolio's EBITDA in the first quarter, marking it as the most concentrated portfolio in Compass Point's coverage.
The company is also in the process of evaluating the use of proceeds from the sale of Boston Park Plaza, which could amount to as much as $240 million. The potential acquisition of two to three additional hotels is being considered to diversify portfolio risk.
The most significant boost to earnings could arise from the sale of the two underperforming wine country properties and the reinvestment into more profitable assets similar to the San Antonio hotel.
Sunstone Hotel Investors has been recognized for its strong, low-leverage balance sheet and excess liquidity, which has facilitated share repurchases at a discount to net asset value (NAV). The revised earnings outlook has rendered the company's valuation more appealing, with shares trading at 11.1 times the projected 2024 EBITDA.
This is slightly above the sector average of 10.3 times, despite Sunstone's below-average EBITDA growth forecast for 2024. Before the COVID-19 pandemic, hotel shares typically traded around 12 to 12.5 times EBITDA, which now positions Sunstone as a potential acquisition target, especially considering the 4.25% stake held by BX Alternative Investment.
While Compass Point sees more attractive relative value in other hotels within its coverage, the firm has raised Sunstone Hotel Investors' price target to $12, reflecting a more balanced view of the stock's prospects.
InvestingPro Insights
As Sunstone Hotel Investors (NYSE:SHO) garners attention with its revised 2024 outlook and strategic property acquisitions, real-time data from InvestingPro provides an additional layer of insight into the company's current valuation and financial health. Sunstone is trading at a low earnings multiple, with a P/E Ratio of 11.34, hinting at a potentially undervalued stock in the market. This aligns with the management’s proactive approach, as they have been aggressively buying back shares, a move that often signals confidence in the company's future prospects.
Furthermore, the company's financial stability is underlined by the fact that its liquid assets exceed short-term obligations, providing it with a cushion to navigate the dynamic hospitality industry. With a moderate level of debt, Sunstone appears well-positioned to manage its financial leverage effectively. Analysts predict the company will be profitable this year, which is corroborated by its profitability over the last twelve months, despite expectations of a net income drop this year.
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