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Solid Ascend Portfolio Aids Choice Hotels (CHH) Amid High Debt

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Choice Hotels International, Inc. (CHH - Free Report) is poised to benefit from the solid Ascend portfolio, and expansion strategies through acquisitions and franchise agreements, both in domestic and international markets. However, stiff competition, high cost of operations, the coronavirus outbreak-led difficulties and high debt level remain concerning.

In the fourth quarter of 2020, Choice Hotels’ earnings and revenues missed the Zacks Consensus Estimate. Due to the pandemic-related uncertainties, the company did not provide any formal guidance for the first quarter or 2021. At most, for the quarter ended Mar 31, 2021, the company expects a sequential improvement in RevPAR. Year to date, RevPAR has declined approximately 18% from the 2020 levels.

Shares of Choice Hotels shares have gained 50.7% over the past year compared with the industry’s 79.6% rally.

 

 

Factors Driving Growth

Choice Hotels’ Ascend portfolio has been doing solid business. With nearly 300 hotels around the globe, Ascend brand RevPAR has significantly outperformed the upscale soft brands (as well as the segment on a whole). During the fourth quarter of 2020, RevPAR outperformed the upscale segment by more than 20 percentage points. For 2020, the brand achieved RevPAR index gains of nearly 13 percentage points.

Choice Hotels’ riveting growth potential depends on the continuous expansion of its brands. With the continuous improvement of the mid-scale brand, acquisition of the WoodSpring brand, and modification and development of the Comfort and Cambria brands, Choice Hotels is assured to grow.

The company depends immensely on expansion in both domestic and international markets. In 2020, it awarded 427 domestic franchise agreements, out of which 70% accounted for conversion hotels. In fourth-quarter 2020, Choice Hotels executed 195 domestic franchise agreements, out of which 70% were for conversion hotels. Alongside domestic growth, the company continues to expand its international footprint in new countries. Key international operating markets include Spain, Colombia, Panama, the Caribbean and Canada.

Choice Hotels gains from economies of scale associated with the franchise business. The company’s 97% of revenues are generated from the franchise business. In 2020, it benefitted from the rollout of grab-and-go breakfast, housekeeping on demand and contactless check-in offerings. Notably, the company’s solid commitment toward franchisee profitability is driving incremental revenues. As of Dec 31, 2020, Choice Hotels had 966 franchised hotels, with 79,470 rooms under construction, awaiting approval for development in its domestic system compared with 1,052 hotels and 84,950 rooms as of Dec 31, 2019.

Concerns

As the Hotels and Motels industry is currently grappling with the coronavirus outbreak-led difficulties, the company has suspended its 2021 guidance. In order to stop the spread of the virus, Choice Hotels has been adhering to temporary closures and travel restrictions, which reduced travel and the demand for hotels.

Moreover, maintaining liquidity has become a herculean task during the pandemic. At the end of Dec 31, 2020, the company’s long-term debt was $1,058.7 and during the fourth quarter, the company’s debt-to-capitalization came in at 100.6% compared with the industry average of 97.3%. Meanwhile, Choice Hotels ended fourth-quarter 2020 with a cash and revolving credit facility of $834.8 million, which may not be enough to manage the high debt level.

Zacks Rank

Choice Hotels, which shares space with Marriott Vacations Worldwide Corporation (VAC - Free Report) , Marriott International, Inc. (MAR - Free Report) and Hyatt Hotels Corporation (H - Free Report) in the Zacks Hotels and Motels industry, currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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