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Choice Hotels (CHH) Strategies Look Strong: Should You Retain?

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Choice Hotels International, Inc. (CHH - Free Report) is poised to benefit from expansion efforts, increased domestic franchise agreements and hotel conversion opportunities. Also, focus on loyalty program offerings bodes well. So far this year, shares of the company have gained 13.9% compared with the industry’s 6.5% growth. However, a decline in occupancy rates and RevPAR from pre-pandemic levels is a headwind.

Let us discuss the factors that highlight why investors should retain the stock for the time being.

Zacks Investment Research
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Growth Catalysts

Choice Hotels’ riveting growth potential depends on consistent expansion of its brands. During first- and second-quarter 2021, it executed 89 and 200 domestic franchise agreements, out of which more than 80% and 43% were for conversion hotels, respectively. Apart from focusing on domestic growth, the company continues to expand its international footprint in new countries. Some key international operating markets include Spain, Colombia, Panama, the Caribbean and Canada. Relatively new to the midscale portfolio, Clarion Pointe — part of the popular Clarion brand — is experiencing great success. Clarion Pointe brand is resonating well with guests. Currently, the brand has more than 30 hotels open in the United States as well as more than 20 additional hotels awaiting conversion this year.

Moreover, the company continues to focus on franchising as it intends to facilitate ROE expansion and earnings growth over the long term. As of Jun 30, 2021, the company had 884 hotels, with 72,000 rooms under construction that are awaiting approval for development in its domestic system. In second-quarter 2021, domestic franchise agreements for new construction hotels rose 21% year over year. As of Jun 30, the company had 7,111 franchised hotels. During the first quarter of 2021, the company reinvested its product portfolio with Comfort's Move to Modern refresh program. Also, the company unveiled a new Comfort prototype to reinforce 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 upcoming periods.

Choice Hotels’ Ascend portfolio has been doing solid business. Ascend has significantly outperformed the upscale soft brands (and the segment on a whole) in terms of year-over-year RevPAR change. During second-quarter 2021, RevPAR change outperformed the upscale segment by more than 26 percentage points. The brand has been well received on account of smart-conversion opportunities.

The company has been focusing on loyalty program offerings. In January 2021, Choice Hotels announced a strategic agreement with Penn National to offer reciprocal earning and redemption benefits to members of Choice Privileges as well as Penn's mychoice loyalty program. Slated for a phased rollout in 2021, the alliance will enable customers to earn and redeem Choice Privileges points and mychoice tier points at 22 Penn locations and more than 7,000 Ascend hotel collections. Members can access gaming brands, such as Hollywood, Ameristar and L'Auberge that include approximately 50,000 gaming machines, 1,300 table games as well as live racing and sports betting. The agreement signals an expansion in benefits for loyalty members of both the companies.

Concerns

The coronavirus pandemic continues to cause disruptions to the global economy and the hospitality industry. Also, the spread of the Delta variant is another concern. The World Health Organization has warned that Delta will become the globally dominant variant of the coronavirus in the coming months. Going forward, the company remains cautious in this regard as rising infections may trigger disruptions again. Thanks to the crisis, the company’s occupancy and RevPAR are lagging behind pre-pandemic levels. We believe that the pandemic is likely to persist and have an adverse material impact on the company for some time.

Zacks Rank & Key Picks

Choice Hotels currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the Zacks Consumer Discretionary sector are Civeo Corporation (CVEO - Free Report) , Vista Outdoor Inc. (VSTO - Free Report) and Mattel, Inc. (MAT - Free Report) , each sporting a Zacks Rank #1.

Civeo has a three-five year expected earnings per share growth rate of 10%.

Vista Outdoor’s 2022 earnings are expected to surge 66.4%.

Mattel has a trailing four-quarter earnings surprise of 121.8%, on average.