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

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Choice Hotels International, Inc. (CHH - Free Report) is likely to benefit from expansion efforts, increased domestic franchise agreements and digital initiatives. Also, focus on loyalty program offerings bodes well. So far this year, shares of the company have gained 31.2% compared with the industry’s 7% growth. However, pandemic-induced disruptions and demand volatility are a concern.

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

Growth Catalysts

Choice Hotels relies heavily 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. Year to date (through Sep 30, 2021), the company awarded 289 domestic franchise agreements, up 25% year over year. During the period, demand for conversion hotels increased 25% year over year. Coming to the extended-stay portfolio, the company witnessed rapid expansion, reaching 467 domestic hotels as of Sep 30, 2021. This highlighted an increase of 11% on a year-over-year basis. The domestic extended-stay pipeline comprised 310 hotels awaiting conversion, under construction or approval for development. Relatively new to the midscale portfolio, Clarion Pointe — part of the popular Clarion brand — is experiencing great success. The Clarion Point brand is resonating well with guests. Currently, the brand has more than 35 hotels open in the United States as well as more than 15 additional hotels awaiting conversion this year.

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The company continues to focus on franchising as it intends to facilitate ROE expansion and earnings growth over the long term. As of Sep 30, 2021, the company had 860 hotels, with 71,000 rooms under construction, awaiting approval for development in its domestic system. In third-quarter 2021, domestic franchise agreements for new construction hotels rose 52% year over year. As of Sep 30, 2021, the company had 7,102 franchised hotels. During third-quarter 2021, the company unveiled new Cambria hotel prototype, specifically designed for the secondary and leisure markets. The prototype allows developers with the flexibility to build hotels at a reduced cost along with design retention. The initiative coupled with strategic conversions are likely to benefit the company in the upcoming periods.

To support its franchise business at a critical juncture in the recovery process, the company initiated a roll out of new mobile-enabled revenue management app. The tool allows franchisees to effectively manage their channel rates and inventory by adapting to local market trends. This includes repricing and competitive rate shopping to execute a right pricing strategy. With higher acceptance of rate recommendations coupled with solid bookings for the Thanksgiving and winter holidays, the company anticipates this enhanced capability to drive the top line in the upcoming periods. Apart from this, the company is emphasizing on the improvement of unit economics with the roll out of a new digital-registration capability. The cost-effective cloud-based solution offers simplification in the hotel’s registration process (for front desk staff), savings on labor, speed up check-ins and improvement in overall guest experience.

The Zacks Rank #3 (Hold) company continues to focus on the loyalty program to drive growth. During the third quarter, the company announced a collaboration with a trusted digital-asset marketplace – Bakkt. The initiative enables Choice Privileges loyalty members to unlock new redemption opportunities by converting their rewards points to cash and for purchasing Bitcoin. Also, it allows guests to transfer their points to a friend or even redeem them online or in-store through Apple Pay and Google Pay. Backed by solid revenue contributions along with new customer additions, the company is optimistic about growth in the upcoming periods.

Concerns

The coronavirus pandemic continues to cause disruptions to the global economy and the hospitality industry. Consequently, reduced travel and demand for hotel rooms have affected the company for some time. Although the company has commenced with the recovery process, we believe that the emergence of the new COVID-19 variant is likely to create volatility in demand.  Going forward, the company is cautious in this regard as rising infections may trigger disruptions again.

Key Picks

Some better-ranked stocks in the Consumer Discretionary sector include Hilton Grand Vacations Inc. (HGV - Free Report) , Bluegreen Vacations Holding Corporation (BVH - Free Report) and Camping World Holdings, Inc. (CWH - Free Report) .

Hilton Grand Vacations sports a Zacks Rank #1 (Strong Buy). The company has a trailing four-quarter earnings surprise of 411.1%, on average. Shares of the company have increased 44.6% so far this year. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Hilton Grand Vacations’ current financial-year sales and earnings per share (EPS) suggests growth of 222.1% and 170.8%, respectively, from the year-ago period’s levels.

Bluegreen Vacations flaunts a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 695%, on average. Shares of the company have surged 115.4% so far this year.

The Zacks Consensus Estimate for Bluegreen Vacations’ current financial-year sales and EPS indicates growth of 27.5% and 199.3%, respectively, from the year-ago period’s levels.

Camping World carries a Zacks Rank #2 (Buy). The company benefits from the launch of a fresh peer-to-peer RV rental marketplace and a mobile service marketplace. It has been investing heavily in product development.

Camping World has a trailing four-quarter earnings surprise of 70.9%, on average. Shares of the company have appreciated 60.6% so far this year. The Zacks Consensus Estimate for CWH’s financial-year sales and EPS suggests growth of 25.9% and 77.1%, respectively, from the year-ago period’s levels.