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Here’s Why Investors Should Bet on Choice Hotels Stock Now

Zacks

Choice Hotels International, Inc. CHH is currently one of the best-performing stocks in the hotel space. With a Zacks Rank #2 (Buy) and decent share price appreciation, the stock is a solid investment choice at the moment.

Shares of Choice Hotels have gained 20.4% in the past year, outperforming the industry’s rally of 11.5%. The company’s riveting growth potential is grounded in continual expansion of brands. In fact, its portfolio of well-segmented brands is getting evidently stronger. By continuous enhancement of the mid-scale brand, acquisition of the WoodSpring brand, as well as transformation and advancement of the Comfort and Cambria brands, Choice Hotels is poised for growth in 2018. Earnings estimates for 2018 have also been revised upward by 0.5% over the past 60 days, reflecting analysts’ optimism surrounding the company’s future earnings potential. Notably, Choice Hotels’ earnings have also surpassed analysts’ expectations in each of the trailing four quarters, with an average of 4.4%.


Franchise Business Model Facilitates Margins and Earnings Growth

Choice Hotels, with 99% of the total revenues being generated from the franchise business, has an edge in term of scale economies. Accordingly, higher fee from franchisees and transference of cost burden onto franchises provide the company with operational advantages. Apart from royalty fees and procurement services revenues, Choice Hotels also collect marketing and reservation system fees to provide support activities for the franchise system. Franchising, as we believe, will facilitate earnings growth over the long term. Arguably, earnings growth is of utmost importance for determining a stock’s potential, as surging profit levels often indicate solid prospects (and stock price gains). In 2018, Choice Hotel’s earnings per share are expected to grow 28.5%.


Continual Expansion and Franchise Growth Aid Top Line

Choice Hotels relies heavily on expansion in both domestic as well as international markets. Apart from constant franchise expansion, the company recently added 239 new extended-stay hotels in 35 states through the acquisition of Woodspring Suites. Meanwhile, management continues to expand its international footprint in new countries alongside domestic growth. In April, the company announced a strategic alliance with Sercotel, a leading hotel operator and franchisor based in Spain. This alliance will enable extension of Choice Hotels’ global footprint in Spain and other markets, as well as creation of new opportunities for additional hotel development across Europe, and Latin America.

We believe that continuous expansion through growth in franchisees is aiding the company’s top line. Management’s solid commitment toward franchisee profitability is driving incremental revenues. In the first quarter of 2018, hotel franchising revenues increased 13% year over year. Also, the Zacks Consensus Estimate for 2018 revenues is pegged at $1.1 billion, reflecting an 11% increase from the past year.

Enhanced Shareholders’ Value

Choice Hotels maintains a capital structure with high financial returns. The company has a long history of returning value to its shareholders through share repurchases and dividends. As of Dec 31, 2017, management repurchased 48.7 million shares of common stock at a total cost of $1.3 billion and had 4 million shares remaining under the current share repurchase authorization. The company began paying quarterly dividend in 2004. Annual dividend in 2017 was 86 cents per share. In the first quarter of 2018, Choice Hotels paid cash dividend totaling $12 million. Based on the current quarterly dividend rate of 22 cents per share of common stock, the company expects to pay dividends of approximately $49 million during 2018. Meanwhile, management repurchased roughly $42 million shares of common stock under its share repurchase program during the quarter.

Higher Net Margin

Traditionally, gross margin for the hospitality companies are always comparatively higher as majority of their expenses come from cost of operations. However, the sector’s profit margin narrows once these expenses from operations are taken into account. Consequently, net profit margin or net margin is considered the accurate metric for gauging profits of hospitality companies. Choice Hotels’ trailing 12-month net margin is 10.9% higher than the industry’s average of 8.7%.

Other Stocks to Consider

Other top-ranked hotel stocks include Hyatt H, Extended Stay STAY and Hilton Grand Vacations HGV, each carrying aZacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Hyatt’s earnings for 2019 are projected to grow 31.1%. Extended Stay and Hilton Grand Vacations’ earnings for 2018 are expected to grow 15% and 54.3%, respectively.

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