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Choice Hotels Expands Franchise Base, Inks Deal With Hammock

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Choice Hotels International, Inc. (CHH - Free Report) recently entered into a franchise agreement with Hammock Worldwide Hotels & Resorts under which it will convert and add eight Choice-branded hotels in the Mid-Atlantic region.

The properties including a mix of the Clarion, Clarion Pointe, Quality Inn, and Rodeway brands are expected to open by year-end and in early 2019 in the respective cities of Pennsylvania, Virginia and New Jersey.

The move underscores the company’s solid commitment toward continuous enhancement of the mid-scale brand by adding franchisee agreements. Presently, Choice Hotels is one of the largest hotel franchisors in the world with more than 6,900 hotels across 40 countries.

Franchise Business Model to Boost Earnings

Choice Hotels generates 99% of the total revenues from franchise business and gains from economies of scale. Accordingly, higher fee from franchisees and transfer of cost burden onto franchises provide the company with operational advantage. Apart from royalty fees and procurement services revenues, Choice Hotels collects marketing and reservation system fees to provide support activities for franchise systems.

Meanwhile, the company’s solid commitment toward franchisee profitability is driving incremental revenues. In the first nine months of 2018, hotel franchising revenues increased 11.9% year over year. New construction domestic franchise agreements in the third quarter of 2018 also increased 37% from the year-ago quarter.

Notably, in the third quarter, hotel franchising revenues improved 9% and the number of domestic franchised hotels and rooms increased 6.8% and 9.6%, respectively. Adjusted EBITDA from hotel franchising activities increased 11% from the prior-year quarter to $135.4 million. In fact, adjusted earnings of $1.24 increased 31% from the year-ago quarter due to the company’s core franchising operations. Thus, we expect the recent franchise to aid earnings growth.

Meanwhile, the Zacks Consensus Estimate calls for current-year earnings growth of 33.7% for the company. The Zacks Consensus Estimate for 2018 revenues is pegged at $1.06 billion, reflecting a 5% increase from last year. Moreover, upward revision in earnings estimates for 2018 reflects analysts’ optimism surrounding the company’s earnings potential. Over the past 60 days, earnings estimates for the year have inched up 2.4%.

Bottom Line

Choice Hotels is continuously facing intense competition from both large hotel chains like Marriott (MAR - Free Report) , Hyatt (H - Free Report) and Hilton (HLT - Free Report) as well as smaller independent local hospitality providers. Thus, we believe the recent move is Choice Hotels’ strategy to counter competition and sustain brand presence. Meanwhile, its shares have declined 11% in the past year, better than the industry’s fall of 27.4%.

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.

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