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Choice Hotels (CHH) Rallies 28% in a Year: What's Behind the Rally?

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Choice Hotels International’s (CHH - Free Report) continuous enhancement of mid-scale brand and the acquisition of WoodSpring brand have been received well by investors. Moreover, the stock has rallied 27.9% in a year’s time, outperforming the industry’s 7.1% rise. However, cost of operations is high and competition intense.

Catalysts Driving Growth

Choice Hotels relies heavily on expansion in both domestic as well as international markets. Apart from constant franchisee expansion, the company recently added 239 new extended-stay hotels in 35 states through the acquisition of Woodspring Suites.

Meanwhile, the company continues to foray into countries alongside expanding domestically. In April, Choice Hotels announced a strategic alliance with Sercotel, a leading hotel operator and franchisor based in Spain. This alliance will help Choice Hotels fortify its global footprint as well as cash in on opportunities in Europe and Latin America.



Further, the franchisee business is a major revenue source for the company. Higher fee from franchisees and transfer of cost burden onto franchises provide the company with operational advantages. Apart from royalty fees and procurement services revenues, Choice Hotels collects marketing and reservation system fees in lieu of support services for franchise systems. 

Notably, in the first half of 2018, hotel franchising revenues increased 13.6% year over year. New construction domestic franchise agreements in the second quarter of 2018 also increased 36% from a year ago while executed domestic franchise agreements rose 7% year over year.
         
The company, which shares space with Hilton Worldwide Holdings Inc. (HLT - Free Report) , has impressed investors with its bottom line performance. It has reported better-than-expected earnings in the eight out of the last nine quarters.

Further, earnings estimates for 2018 have been revised 1.6% upward over the past 30 days, reflecting analysts’ optimism surrounding the company’s earnings potential. For 2018, Choice Hotels expects earnings of $3.71-$3.77, up from the earlier guidance of $3.61-$3.71.

Concerns

High cost of operations and intense competition are major factors affecting the company’s profitability. It has been seen that total operating expenses in the first six months of 2018 increased 10% year over year, denting its gross margin.

Meanwhile, Choice Hotels faces intense competition from both large hotel chains and smaller independent local hospitality providers. Also, new channels of distribution in the travel industry may thwart revenue growth. Moreover, decline in consumer demand due to adverse economic conditions, poor travel patterns, lower consumer confidence and high unemployment can eat into the company’s profitability.

Zacks Rank & Stocks to Consider

Choice Hotels carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the hotels and motels industry are Hyatt Hotels Corp. (H - Free Report) and Red Lion Hotel Corp. (RLH - Free Report) , sporting a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Hyatt Hotels has reported better-than-expected earnings in the trailing four quarters, with an average of 34.5%.

Shares of Red Lion have witnessed a sharp gain of nearly 44% in the past six months.

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