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La Quinta Motor Inns
NYSE:LQ
1978-1987
Industry: Hotel
Category: Nicher
Context
Motel industry is low growth and highly competitive
Motel chain based out of Texas
Why the Company is Mispriced
Hasn't built a national reputation.
Share price doubled over last year.
Important insider sold his shares at half the current price.
Only 3 analysts and <20% institutional ownership (apparently this is little).
Alternative View
Believed that the motel industry was due for a turnaround
During an interview with a United Inns VP, Lynch asked him who was their most successful competitor (often answer isn't good, but when it's good it's a gem)
The VP was very impressed with La Quinta Motor Homes
Lynch spoke to the CEO and learned that La Quinta is Holiday Inn-like quality hotels but 30% cheaper
General rule is you pay 1/1000th of a room's cost when you rent it for a night
La Quinta is 30% cheaper than Holiday Inn by cutting excess overhead: conference rooms, large reception areas, restaurants
Hotel restaurants typically lose money and are the source of 95% of complaints
Instead, install an independent Denny's-like restaurant next door
No one else has captured this market between budget hotels and Holiday Inns
La Quinta demonstrated success is Texas, Arkansas, Louisana, planning rapid expansion
Made the concept 120 rooms instead of standard 250 (easier to manage, lower upfront capital), possible to be managed by a live-in
Locations are close to business districts, focused on business people who have to travel a lot
Financing favourably through an insurance company in exchange for share of profit, insurance company unlikely to be restrictive since they participate in growth
Lynch slept in 3 different La Quintas to test quality
Trading at 10x earnings, growing 50% a year, Lynch knew expansion plans to track progress
Result
Lynch claims La Quinta was a 11x for him in 10 years, a 27% CAGR
Notably
"Muckamucks speak negatively about the competition ninety-five percent of the time, and it doesn’t mean much.
But when an executive of one company admits he’s impressed by another company, you can bet that company is doing something right.
Nothing could be more bullish than begrudging admiration from a rival." - Peter Lynch
Lynch later learned, the insider (member of founding family) sold to diversify
Lynch said it's a terrible reason to dislike a stock because of insider selling
Interesting that it cost $12/night in 1978