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Here's Why You Should Hold on to Extended Stay Stock for Now

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Extended Stay America, Inc. (STAY - Free Report) is likely to benefit from four-pillar strategy, cost control and digital efforts. Also, the company’s expansion strategy bodes well. However, elevated expenses, intense competition and coronavirus-related woes remain concerns.

Let us delve deeper into factors highlighting why investors should hold on to the stock for the time being.

Growth Catalysts

Extended Stay continues to focus on its four-pillar strategy to unlock and create shareholder value in the coming years. The first pillar is to maximize core operations and drive more extended stay demand at the company's properties. This pillar has already shown positive results as the company's business segment has seen strong upward trajectory this year. The second pillar is to pursue accretive asset sales for certain assets that can yield a higher value through alternative uses. The third pillar is furthering on the company's asset light strategy, with focus on franchise growth. The last pillar is return of capital to shareholders.

While the challenging environment has limited the company's ability to actively pursue some of the pillars, we believe management is focused on executing on each of these strategic goals, which should further unlock shareholder value.

In a bid to drive growth in the long run, Extended Stay is banking on numerous strategic efforts. Notably, the company is refocusing on core customers. Also, its initiatives toward controlling costs and reducing capital requirement for fresh hotel builds are commendable. Under its ESA 2.0 strategy, the company aims to franchise its brands and drive growth through various strategies. It also plans on enhancing its digital capabilities that would eventually boost revenues and earnings.

Moreover, the company is banking on increasing unit growth to drive revenue per available room. At the end of second-quarter 2020, the company had a pipeline of 69 hotels. However, the company announced that it doesn’t expect pipeline to increase significantly until the market conditions improve and RevPAR level starts to rise.

So far this year, shares of the company have fallen 17.1% compared with the industry’s 22.2% fall.

Concerns

Extended Stay has been facing increased expenses from franchise operations. The company’s hotel operating margin in first-quarter 2020 was 41.7%, reflecting a decline of 1,270 bps from the prior-year quarter due to the coronavirus pandemic. Margin in the coming quarters is likely to be impacted by the ongoing crisis. Capital expenditures for 2020 are expected the range of $160 million to $190 million.

Moreover, intense competition from the likes of Marriott (MAR - Free Report) , Hilton (HLT - Free Report) and Hyatt (H - Free Report) , coupled with limited exposure in international markets makes the Zacks Rank #3 (Hold) company vulnerable. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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