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Strategic Efforts Drive Choice Hotels (CHH) Amid High Costs

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Choice Hotels International, Inc. (CHH - Free Report) has been benefiting from continuous expansion, acquisitions and other strategic efforts. Moreover, enhancement of mid-scale brand and the acquisition of WoodSpring brand have contributed to the upside.

Notably, shares of Choice Hotels have gained 40.6% in the past year compared with the industry’s 35.5% rise.                         

However, intense competition and higher costs of operations are headwinds.

Let’s discuss the factors that substantiate the company’s Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.



Growth Catalysts

Choice Hotels continues to benefit from expansion in domestic as well as international markets. During the third quarter of 2019, the hotelier awarded 100 total franchise agreements. Along with domestic growth, the company’s initiative to expand its international footprint in new countries is also encouraging. Some key international operating markets include Spain, Colombia, Panama, the Caribbean and Canada.

In 2018, the company collaborated with Sercotel to expand its global footprint in Spain and other markets as well as create opportunities for additional hotel development across Europe and Latin America.

Moreover, the company is focusing on franchising business to drive growth. The company’s franchise business generates 99% of revenues. Choice Hotels gains from economies of scale associated with the franchise business. Franchising, as we believe, will facilitate ROE expansion and earnings growth over the long term.

Moreover, the company strengthened its mid-scale presence with the recent launch of Clarion Pointe. Expansion of the brand is expected to occur through 21 Clarion Pointe franchise agreements.

Apart from constant franchise expansions, Choice Hotels has added 239 extended-stay hotels in 35 states to its portfolio through the acquisition of Woodspring Suites in 2018. In 2018, the company completed the opening of additional 12 WoodSpring hotels in top markets like Chicago, Seattle, Charlotte and Detroit. Further, growth is expected to accelerate in 2020, as the company expects to operate 300 WoodSpring hotels.

Headwinds

In spite of positive synergies to be realized from acquisitions and focus on franchising, the company is shouldering high costs of operations. Total operating expenses in the first nine months of 2019 increased 10% to $581.8 million. Also, intense competition from large hotel chains and smaller independent local hospitality providers are additional headwinds.  Unless the company overcomes the hurdles through appropriate strategies, these may exert pressure on profitability.

Key Picks

Some better-ranked stocks in the Consumer Discretionary sector are Boyd Gaming Corporation (BYD - Free Report) , Hilton Worldwide Holdings Inc (HLT - Free Report) and Marriott Vacations Worldwide Corporation (VAC - Free Report) . Boyd Gaming sport a Zacks Rank #1, whereas Hilton Worldwide and Marriott Vacations carries a Zacks Rank #2 (Buy).

Boyd Gaming has three-five year expected earnings per share growth rate of 13%.

Hilton Worldwide surpassed estimates in all of the trailing four quarters, the average being 6.9%.

Marriott Vacations 2020 earnings are expected to rise 13.6%.

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