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Choice Hotels International Inc. (CHH - Snapshot Report) reported fourth-quarter 2012 adjusted earnings from continuing operations of 45 cents, breezing past the Zacks Consensus Estimate by 4 cents. The results missed the year-ago earnings by a penny. The company’s top line growth and cost saving initiatives boosted the quarterly earnings. In full-year 2012, earnings were $2.11 per share; ahead of the year-ago earnings of $1.92.

On a reported basis, fourth quarter earnings were 42 cents; in line with the year earlier quarter. In 2012, earnings were $2.07 versus $1.85 in the year-earlier period.

Revenues increased 7% year over year to $178.3 million in the quarter. The revenues surpassed the Zacks Consensus Estimate of $173 million. In 2012, revenues surged 8% year over year to $691.5 million.

Inside the Headline Numbers

During the fourth quarter, franchising revenues were $77.0 million, up 4% year over year with the rise in the revenues for the company’s other categories. Royalty fees soared 5% annually to $66.0 million.

Revenue per available room (RevPAR) witnessed a 4.2% rise domestically with the surge in occupancy and average daily rates. System-wide effective royalty rate was 4.36%, up 5 basis points (bps) from the year earlier quarter.

Gross operating margin was up about 210 bps annually to 25.4% during the fourth quarter. Adjusted franchising margin nudged up 400 bps annually to 60.8%.

The company has entered into 473 domestic hotel franchise agreements up 42% year over year.

Update on Hotel Rooms

During the quarter under review, Choice Hotels has entered into 214 domestic hotel franchise agreements. These consist of 174 refurbishment projects and 40 new constructions. As of December 31, 2012, the company’s pipeline included 482 hotels, consisting of almost 38,969 rooms worldwide. The company currently franchises 6,200 hotels with nearly 499,000 rooms across the U.S. and 30 other countries.

Liquidity

At quarter end, Choice Hotels had cash and cash equivalents of $134.2 million while its long-term debt was $847.2 million.

Shareholder Value Enhanced

The company bought back 0.5 million shares worth $19.9 million in 2012 whereas it did not buy back any shares in the fourth quarter. The company can buy additional 1.4 million shares under its current share repurchase authorization.

In 2012, the hotelier paid $654.1 cash dividend with $600.7 million special cash dividend.

Outlook

For first-quarter 2013, earnings are expected to be approximately 26 cents per share. The company anticipates RevPAR growth of 5% in the quarter.

For full-year 2013, the company expects that its earnings per share will be between the range of $1.96–$1.98 per share. RevPAR growth is expected between 4.5% and 5.5% in 2013. Net domestic unit is likely to grow by 1.5%, whereas effective royalty rate would rise by 3 bps in the year.

Effective tax rates are expected to be within 28.5% and 30.6% in the quarter as well in 2013.

Our Take

Given its significant expansion plan, international exposure, strong brand recognition and better financial performance we believe the company is likely to grow going forward. Additionally, the hotelier’s continuous enhancement of shareholders’ value augurs well for the company.

However, we remain cautious on the stock based on its lowered earnings guidance and current economic condition.

Choice Hotels currently carries a Zacks Rank #2 (Buy). Another hotel company Wyndham Worldwide Corporation (WYN - Analyst Report) recently declared its fourth quarter 2012 adjusted earnings of 63 cents per share, ahead of the Zacks Consensus Estimate of 60 cents per share and increased 34% year over year. Wyndham currently carries a Zacks Rank #2 (Buy).

Some other hotel companies worth a mention include The Marcus Corporation (MCS - Snapshot Report) and Intercontinental Hotels Group plc (IHG - Snapshot Report) which carry a Zacks Rank #1 (Strong Buy) and a Zacks Rank #2 (Buy), respectively.

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