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Choice Hotels Upside Persists

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Choice Hotels International Inc. (CHH - Free Report) reported third quarter 2012 earnings per share of 76 cents, substantially beating the Zacks consensus Estimate of 62 cents. Moreover, the earnings were 7% higher than the year-ago level of 71 cents.

Quarter Highlights

Total revenue came in at $210.4 million, up 9.0% year over year. Also, revenue significantly surpassed the Zacks Consensus Estimate of $202.0 million. The increase was mainly attributable to increase in franchising revenue and domestic system-wide revenue per available room (RevPAR) and occupancy hike.

During the reported quarter, franchising revenue stood at $90.1 million, up 4% year over year. System-wide domestic hotels revenue per available room (RevPAR) increased 5.6% to $51.09 on a year-over-year basis, mainly driven by a continuous improvement in occupancy and brand pricing growth. Occupancy increased 180 bps (basis points) to 65.0% and Average Daily Rate upped 2.7% year over year to $78.63.

Operating income of the company expanded 5% to $62.4 million, while EBITDA (Earnings before interest, taxes, depreciation and amortization) surged 4% to 67.3 million.

Hotels Update

During the quarter, Choice Hotels signed 89 new domestic hotel franchise contracts, which marked an increase of 13% year over year. As of September 30, 2012, the company has 435 hotels, comprising 36,150 rooms currently under development, awaiting conversion or approved for development.

At the end of the quarter, Choice Hotels has approximately 6,200 franchised hotels with over 495,000 rooms across the United States and more than 30 other countries and territories


Choice Hotels ended the third quarter with cash and cash equivalents of $115.1 million and gross debt of $819.0 million.


For the fourth quarter 2012, the company expects earnings per share to be at least 40 cents and RevPAR to increase around 4%.

For 2012, Choice Hotels predicts earnings per share to be in the range of $2.05 – $2.07 and   EBITDA in the range of $201 million – $202.5 million. RevPAR is anticipated to increase in the range of 6% – 6.5% for 2012.

Our Viewpoint

Despite a challenging economic environment, Choice Hotels’ achievement of 7% growth in earnings, increase in RevPAR and occupancy levels depicts the strength in the company’s fundamentals.

Moreover, we expect the company to further benefit from investment in programs designed to drive customer traffic, improve guest loyalty and brand value. Based on strong third quarter results, we expect the estimates to go up in the coming days.

One of the company’s peers, Wyndham Worldwide Corporation announced third quarter 2012 adjusted earnings of $1.13 per share surpassing the Zacks Consensus Estimate and year-ago quarter adjusted earnings by 20%.

Choice Hotels currently carries a Zacks #2 Rank, which translates into a short-term Buy rating. We are also maintaining our long-term Neutral recommendation on the stock.

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