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Choice Hotels (CHH) Down 3.6% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Choice Hotels (CHH - Free Report) . Shares have lost about 3.6% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Choice Hotels due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Choice Hotels Q3 Earnings Beat, Revenues Lag Estimates

Choice Hotels reported mixed results in third-quarter 2018, wherein earnings surpassed the Zacks Consensus Estimate but revenues lagged the same.

Adjusted earnings of $1.24 outpaced the consensus mark of $1.15 by 7.8% and increased 31% from the year-ago quarter. With this, the company has topped earnings estimates for the third straight quarter. Notably, the bottom line was aided by the company’s core franchising operations and an effective tax rate.

Total revenues came in at $291.5 million, which fell short of the consensus mark of $324 million but increased 8% from the year-ago. The top line lagged the estimate for the third consecutive quarter.

Increased demand for lodging along with Choice Hotel’s continual expansion strategies through acquisitions and franchise agreements has led to the company’s top- and bottom-line growth on a year-over year basis.

Franchising & Royalties Details

Hotel franchising revenues improved 9% in the third quarter. Adjusted EBITDA from hotel franchising activities increased 11% from the prior-year quarter to $135.4 million. However, adjusted hotel franchising margins contracted 30 basis points (bps) year over year to 74.6%.

Domestic royalty fees amounted to $105 million, marking an 8% increase year over year. Meanwhile, domestic system-wide RevPAR declined 1.4% year over year. While average daily rates (ADR) moved up 0.9%, occupancy decreased 160 bps from the prior-year quarter. Weather, hotel renovations and the timing of holidays impacted the company’s RevPAR in the third quarter.

As of Sep 30, 2018, the number of domestic franchised hotels and rooms increased 6.8% and 9.6%, respectively.

Operating Results

In the reported quarter, total operating expenses summed $180.3 million, up 2% from the third quarter of 2017. Operating income increased 19% to $111.2 million. Net income totaled $80 million, up 40% year over year.

Balance Sheet

Cash and cash equivalents at the end of the third quarter were $30.9 million compared with $235.3 million as of Dec 31, 2017.

Long-term debt as of Sep 30, 2018, was $781.4 million, up from $725.3 million as of Dec 31, 2018. Goodwill, as a percentage of total assets, at the end of the third quarter was 15%, up from 8.1% at the end of 2017.

By the end of the third quarter of 2018, Choice Hotels paid cash dividends of nearly $37 million. Based on the current quarterly dividend rate of 21.5 cents per share of common stock, the company expects to pay dividends worth approximately $49 million in 2018. Meanwhile, management repurchased roughly $109 million shares of common stock under its share repurchase program during the first nine months of 2018.

Fourth-Quarter Guidance

For the fourth quarter, earnings per share (EPS) are anticipated to be 78-85 cents. Domestic RevPAR is expected to increase in the range of 1-3%.

Raises 2018 EPS Outlook

For 2018, Choice Hotels expects EPS to be $3.79-$3.86, up from the earlier guidance of $3.71-$3.77. Adjusted EBITDA is expected to be between $335 million and $340 million.

Net domestic unit growth is expected to be in the 7-8% band. Domestic RevPAR is expected to grow between 1% and 2%.

 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Choice Hotels has a great Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Choice Hotels has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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