Shorting Orient-Express?

From Venice’s Hotel Cipriani to New York’s 21 Club, the properties owned by luxury travel company Orient-Express Hotels (OEH) may be among the priciest in the world but is the company’s share price overvalued? Eric Wolff, writing for Seeking Alpha, seems to think so. Wolf explains that the reason why OEH has been trading at the “richest multiple of any publicly traded lodging company” with a P/E of 53 and an EV/EBIDTA of over 20 (comparable companies are trading at P/Es of 20x and EV/EBIDTA of about 10x, he writes) is because investors have been sniffing an acquisition ever since company founder and former chairman and CEO Jim Sherwood stepped down in June. The problem is that management has shown no inclination to sell. Wolff thinks it’s time to short the stock.

Now, don't get me wrong, I love the properties. Over the years, I have had the pleasure of staying at many of them, but the company has always had the air of being run more as a rich man's hobby than as a serious business. That is because that is more or less how it got it's start, when Sea Container's founder Jim Sherwood acquired the Cipriani in 1976 as part of Sea Container's luxury division. (Sherwood stepped down from his position as chairman and CEO of OEH in June of 2007 though he remain on the board. Sea Containers declared bankruptcy in October 2006. Both Sea Containers and OEH are headquartered in Hamilton, Bermuda, and are still tightly connected. Sherwood's son Charles is a director of Sea Containers, John D. Campbell sits on the board of both companies, and Edwin Hetherington serves as vice-president, general counsel and secretary for both.)

Over the years, the portfolio expanded to include more than 50 properties in 25 countries, including luxury trains (the eponymous Venice-Simplon Orient-Express, which Sherwood literally brought out of mothballs), restaurants, safaris and condominiums. In 2000, the company went public and, according to the company's web site, for 2006, which was the last year for which figures are available, Orient-Express Hotels had net earnings of $39.8 million on revenue of $510.5 million.

2007 looks to have been a good year for the company too. The Q3 earnings report states that EBIDTA was up 20% year-over-year and net earnings for the first nine months through Sept. 30 were up 16% to $38.6 million.

The questions are whether this growth is sustainable--and whether the company's share price deserves to remain so buouyant if no acquisition should arise. Wolff, who is short the stock, seems not to think so. He points out three factors that could lead to a drop: 1) the company's overdependence on U.S.-based leisure travelers, many of whom might be adversely affected by unfavorable exchange rates; 2) a slow down in its real estate developments and a concern that several existing projects may not be able to recoup costs in a timely manner; and 3) despite the announcement in November that it was building its first luxury hotel in Manhattan--a project that is expected to cost around $220 million--the acquisition frenzy that has characterized the company over the past few years will slow.

Can OEH continue to go it alone? There are a long line of suitors, many from emerging markets, who are hoping they can't. Wolff evidently thinks that won't happen but the board could change their mind. The only thing that would be a shame would be if either scenario included OEH dropping some of its properties. Think what you may about the company's performance but they sure do know how to cater beautifully to their well-heeled guests.