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Choice Hotels Strategic Efforts Bode Well: Should You Hold?

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Choice Hotels International, Inc. (CHH - Free Report) is poised to benefit from increased domestic franchise agreements, solid progress on its flagship Comfort brand and continued expansion of its Cambria brand across the United States. However, stiff competition, high cost of operations and the coronavirus outbreak — which has become a pandemic — are likely to hurt the company going forward.

In the fourth quarter of 2019, Choice Hotels’ earnings surpassed the Zacks Consensus Estimate. The bottom line surpassed the consensus mark for the eighth straight quarter. For 2020, the company expects earnings per share in the range of $4.22-$4.33, whereas the Zacks Consensus Estimate for the same is pegged at $4.31.

Although the company has solid earnings trend, shares of Choice Hotels have lost 15.9% in the past year compared with the industry’s decline of 37.1%.



Growth Catalysts

Choice Hotels’ riveting growth potential depends on consistent expansion of its brands. With continuous enhancement of the mid-scale brand and the acquisition of the WoodSpring brand as well as transformation and advancement of the Comfort and Cambria brands, the hotelier is poised for growth in 2020 and beyond.

During fourth-quarter 2019, the hotelier was awarded 307 domestic franchise agreements, up 7% year over year. Apart from focusing on domestic growth, the company continues to expand its international footprint in new countries. Key international operating markets include Spain, Colombia, Panama, the Caribbean and Canada. Clarion Pointe, which is relatively new to the midscale portfolio and part of the popular Clarion brand, is experiencing great success.

The company’s 97% of revenues are generated from the franchise business. Choice Hotels gains from economies of scale associated with the franchise business. The company’s solid commitment toward franchisee profitability is driving incremental revenues. The number of domestic franchised hotels and rooms as of Dec 31, 2019, increased 1.6% and 2.9%, respectively, from the year-ago levels.

Apart from constant franchise expansions, Choice Hotels added 239 extended-stay hotels in 35 states to its portfolio through the acquisition of Woodspring Suites in 2018. In 2019, the extended stay domestic pipeline increased 13% year over year to 315 hotels. This was primarily driven by continued expansion of the Woodspring brand.

Concerns

As the Hotel and Motels industry is currently grappling with the coronavirus outbreak in China, the company has withdrawn its 2020 guidance has been withdrawn. Management has not been able to quantify the impact on its projected results, given the uncertainty surrounding the impact of COVID-19 on the global hospitality industry and specifically on the U.S. travel market.

Despite the positive synergies to be realized from acquisitions and focus on franchising, Choice Hotels is bearing the brunt of high costs from operations. Total operating expenses in 2018 increased 20.1% year over year. Total operating expenses in 2019 increased 9% to $781.2 million.

Zacks Rank & Key Picks

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.

Few better-ranked stocks in the Zacks Consumer Discretionary sector are Vista Outdoor Inc. (VSTO - Free Report) , YETI Holdings, Inc. (YETI - Free Report) and Mattel, Inc. (MAT - Free Report) , each sporting a Zacks Rank #1.

Vista Outdoor’s 2020 earnings are expected to surge 42.9%.

YETI Holdings has a three-five year expected earnings per share growth rate of 17.6%.

Mattel’s 2020 earnings are expected to surge 120%.

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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