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Here's Why You Should Retain Choice Hotels (CHH) Stock Now

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Choice Hotels International, Inc.’s (CHH - Free Report) focus on expansion strategies, enhancement of the mid-scale brand, and the transformation and advancement of the Comfort brands bode well. In the past year, the company’s shares have surged 50.5%, compared with the industry’s rally of 50.7%. However, the coronavirus pandemic remains a concern. Let’s delve deeper.

Growth Catalysts

Choice Hotels relies heavily on expansion in both domestic and international markets. In 2020, the company awarded 427 domestic franchise agreements, out of which 70% accounted for conversion hotels. During first-quarter 2021, the company executed 89 domestic franchise agreements, out of which more than 80% 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. Relatively new to the midscale portfolio, Clarion Pointe, which is part of the popular Clarion brand, is experiencing great success. Clarion Pointe brand is resonating well with guests. The brand currently has more than 20 hotels (in the pipeline). During the first quarter, the brand opened its 30th hotel in the United States.

Choice Hotels’ Ascend portfolio has been doing solid business. With nearly 380 hotels globally, Ascend has significantly outperformed the upscale soft brands (as well as the segment on a whole) in terms of year-over-year RevPAR change. During first-quarter 2021, RevPAR change outperformed the upscale segment by more than 19 percentage points. The brand has been well received on account of smart conversion opportunities.

The company unveiled new Comfort prototype to strengthen the brand’s leadership position in the upper mid-scale segment. The initiatives coupled with strategic conversions are likely to benefit the company in the days ahead.

Franchising, as we believe, will facilitate ROE expansion and earnings growth over the long term. Meanwhile, the company’s solid commitment toward franchisee profitability is driving incremental revenues. As of Mar 31, 2021, it had 943 franchised hotels with 77,292 rooms under construction awaiting approval for development in its domestic system compared with 1,000 hotels and 80,390 rooms as of Mar 31, 2020.

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Concerns

The Hotel and Motels industry is currently grappling with the coronavirus pandemic and Choice Hotels isn’t immune to the trend. In order to mitigate the spread of the virus, the company has been adhering to temporary closures, "shelter in place" orders, travel restrictions, cancellation of events, conferences and meetings, social-distancing measures, and other governmental regulations. As a result, reduced travel and demand for hotels has negatively impacted the business. Occupancy and RevPAR are still below the pre-pandemic levels. We believe that the pandemic related woes are likely to persist and have an adverse material impact on the company as well as the hospitality industry.

Choice Hotels, which shares space with Hyatt Hotels Corporation (H - Free Report) , Hilton Grand Vacations Inc. (HGV - Free Report) and Marriott International, Inc. (MAR - Free Report) , 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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