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Choice Hotels (CHH) Down 5.1% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Choice Hotels (CHH - Free Report) . Shares have lost about 5.1% in that time frame, underperforming 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 its most recent earnings report in order to get a better handle on the important catalysts.

Choice Hotels Q4 Earnings Beat, Revenues Miss Estimates

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

Adjusted earnings of 88 cents per share outpaced the consensus mark of 83 cents by 6% and increased 29% from the year-ago quarter. With this, the company topped earnings estimates for the fourth straight quarter. Notably, the bottom line was aided by Choice Hotel’s core franchising operations.

Total revenues were $245 million, which lagged the consensus mark of $263 million but increased 10.6% from the year-ago. The top line lagged estimates for the fourth consecutive quarter.

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

Details of Franchising & Royalties

Hotel franchising revenues improved 13% in the fourth quarter. Adjusted EBITDA from hotel franchising activities increased 12% from the prior-year quarter to $77.5 million. However, adjusted hotel franchising margins contracted 320 basis points (bps) year over year to 67.1%.

Domestic royalty fees amounted to $80.3 million, marking a 10% year-over-year increase. Meanwhile, domestic system-wide RevPAR increased 0.7% year over year. While average daily rate (ADR) moved up 0.4%, occupancy increased 20 bps from the prior-year quarter.

The company’s new executed domestic franchise agreements came in at 287 in the fourth quarter, bringing the full-year domestic franchise agreements to 756, marking an increase of 7% year over year.

New domestic franchise agreements for the company's extended-stay brands totaled 161 for 2018, marking an increase of 156% (37% excluding WoodSpring Suites) from the comparable period of 2017.

Operating Results

In the reported quarter, total operating expenses summed $188.6 million, up 20.1% from the fourth quarter of 2017. Operating income decreased 19.5% to $52 million. Net income totaled $31.5 million against net loss of $9.8 million in the fourth quarter of 2017.

Balance Sheet

Cash and cash equivalents at the end of the fourth quarter were $26.6 million compared with $235.3 million as of Dec 31, 2017.

Long-term debt as of Dec 31, 2018, was $753.5 million, up from $725.3 million as of Dec 31, 2017. Goodwill, as a percentage of total assets, at the end of the fourth quarter was 14.8%, up from 8.1% at the end of 2017.

By the end of the fourth quarter of 2018, Choice Hotels paid cash dividends of nearly $49 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 $48 million in 2019. Meanwhile, management repurchased roughly $149 million shares of common stock under the share repurchase program during 2018.

First-Quarter Guidance

For the first quarter of 2019, earnings per share (EPS) are anticipated to be 72-76 cents. The Zacks Consensus Estimate for the same is pegged at 77 cents, exceeding the company’s guided range. Domestic RevPAR is expected to remain unchanged year over year in the first quarter.

2019 Outlook

For 2019, Choice Hotels expects EPS to be $4-$4.13, lower than the Zacks Consensus Estimate of $4.19. Adjusted EBITDA is expected to be between $354 million and $363 million.

Net domestic unit growth is expected to be 2-3%. Domestic RevPAR is expected to grow between 0.5% and 2%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Choice Hotels has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. 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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