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Choice Hotels (CHH) Tops Industry in the Past Year: Here's Why

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Choice Hotels International, Inc. (CHH - Free Report) is poised to benefit from its franchise business, expansion efforts and the loyalty program. Also, focus on hotel conversions and enhancement of midscale brands bode well.

Shares of Choice Hotels have surged 44.9% in the past year compared with the industry’s 37.7% growth. The price performance was backed by a solid earnings surprise history. Choice Hotels earnings surpassed the Zacks Consensus Estimate in 10 of the trailing 14 quarters. Earnings estimates for full-year 2021 and 2022 have moved up 6% and 8%, respectively, in the past 60 days. This positive trend signifies bullish analysts’ sentiments and justifies the company’s Zacks Rank #1 (Strong Buy). This indicates robust fundamentals and the expectation of outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.

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Major Growth Drivers

Franchise Business: Choice Hotels gains from economies of scale associated with the franchise business. Accordingly, higher fees from franchisees and transference of cost burden to franchises provide the company with operational advantages. Apart from royalty fees and procurement services revenues, Choice Hotels also collects marketing and reservation system fees to provide support activities for the franchise system. The company continues to focus on franchising as it intends to facilitate ROE expansion and earnings growth over the long term. During the first quarter of 2021, the company reinvested its product portfolio with Comfort's Move to Modern refresh program. The company unveiled a new Comfort prototype to reinforce the brand’s leadership position in the upper midscale segment. The initiatives coupled with strategic conversions are likely to benefit the company in the upcoming periods.

Expansion Initiatives: Choice Hotels relies primarily on expansion in the domestic and international markets. In 2020, the company awarded 427 domestic franchise agreements, out of which 70% accounted for conversion hotels. During first- and second-quarter 2021, it executed 89 and 200 domestic franchise agreements, out of which more than 80% and 43%, respectively, were for conversion hotels. Coming to the extended-stay portfolio, the company witnessed rapid expansion and recorded 460 domestic hotels as of Jun 30, 2021. This marked an increase of 11% on a year-over-year basis. The domestic extended-stay pipeline comprised 300 hotels awaiting conversion, under construction or approval for development. Along with 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.

Ascend Brand a Driving Factor: Choice Hotels’ Ascend portfolio has been doing solid business. 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 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. During the quarter, the number of domestic hotels in the upscale segment rose 24% year over year on an 11% increase in room count for the Cambria Hotels brand and 28% for the Ascend Hotel Collection.

Emphasis on Loyalty Program: Choice Hotels has been focused on loyalty program offerings. In January 2021, the company 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 the loyalty members of both companies.

3 Picks You Can’t Miss Out On

Some other top-ranked stocks in the Zacks Consumer Discretionary sector are Sonos, Inc. (SONO - Free Report) , Caleres, Inc. (CAL - Free Report) and InterContinental Hotels Group PLC (IHG - Free Report) . Sonos and Caleres sport a Zacks Rank #1, while InterContinental Hotels carries a Zacks Rank #2 (Buy).

Sonos has a three-five year expected earnings per share growth rate of 41.9%.

Caleres has a trailing four-quarter earnings surprise of 1,001.6%, on average.

InterContinental’s 2021 earnings are expected to surge 283.9%.