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Choice Hotels (CHH) Up 1.2% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Choice Hotels (CHH). Shares have added about 1.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Choice Hotels due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Choice Hotels (CHH) Q1 Earnings Beat, Revenues Miss Estimates

Choice Hotels reported mixed results in first-quarter 2019, wherein earnings surpassed the Zacks Consensus Estimate but revenues lagged the same.

Adjusted earnings of 84 cents per share outpaced the consensus mark of 75 cents by 12% and increased 25% from the year-ago quarter. This marked the company’s fifth straight quarter of earnings beat. Notably, the bottom line was aided by Choice Hotel’s core franchising operations.

Increased investments in midscale, upscale and extended-stay brands helped Choice Hotels to accelerate growth.

Total revenues were $218.3 million, which lagged the consensus mark of $222.4 million but increased 4% from the year-ago quarter. Markedly, the top line lagged estimates for the fifth consecutive quarter.

Details of Franchising & Royalties

Hotel franchising revenues improved 4.6% year over year in the first quarter. Adjusted EBITDA increased 8% from the prior-year quarter to $72.4 million.

Domestic royalty fees amounted to $75.6 million, marking a 5% year-over-year increase. Moreover, domestic system-wide RevPAR increased 0.7% year over year. However, average daily rate (ADR) declined 0.1% and occupancy decreased 30 basis points (bps) from the prior-year quarter.

The company’s newly executed domestic franchise agreements came in at 79 in the first quarter, which includes 32 new construction franchise agreements.

As of Mar 31, 2019, the number of domestic franchised hotels and rooms grew 2.1% and 1.8% year over year, respectively. Meanwhile, its extended stay domestic franchised hotels (as of Mar 31, 2019) grew 5% from a year ago.

Operating Results

In the reported quarter, total operating expenses totaled $163 million, down 0.1% from first-quarter 2018. Adjusted operating income increased 7.7% to $67.4 million and adjusted operating margin expanded 120 bps year over year.

Balance Sheet

Cash and cash equivalents at the end of the first quarter were $31.8 million compared with $26.6 million as of Dec 31, 2018.

Long-term debt as of Mar 31, 2019, was $804.7 million, up from $753.5 million on Dec 31, 2018. Goodwill, as a percentage of total assets, was 14.1% at the end of the first quarter, down from 14.8% at 2018-end.

By the end of first-quarter 2018, Choice Hotels paid cash dividends of $12 million. Based on the current quarterly dividend rate of 21.5 cents per share, the company expects to pay dividends worth approximately $48 million in 2019. Meanwhile, management repurchased roughly $0.4 million shares under the share repurchase program during the quarter.

Q2 Guidance

For the second quarter, adjusted earnings per share (EPS) are anticipated to be $1.11-$1.15, lower than the Zacks Consensus Estimate for the same that is pegged at $1.18. Domestic RevPAR is expected between down 1% and up 1% from the year-ago period.

2019 Guidance

Choice Hotels now expects EPS between $4.06 and $4.18, up from the prior expectation of $4-$4.13. The expectation is also higher than the Zacks Consensus Estimate of $4.11, considering the mid-point of the guided range. Adjusted EBITDA projection is maintained within $354-$363 million.

Net domestic unit growth is expected to be 2-3%. Domestic RevPAR is now expected to grow between 0% and 1% versus the prior projection of 0.5-2%.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months.

VGM Scores

At this time, Choice Hotels has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% 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

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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