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A month has gone by since the last earnings report for Extended Stay America (STAY). Shares have added about 9% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Extended Stay America due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Extended Stay Earnings Beat Estimates, Fall Y/Y
Extended Stay reported third-quarter 2020 results, wherein earnings and revenues beat the Zacks Consensus Estimate. However, both the top and bottom lines declined on a year-over-year basis, thanks to a drop in comparable company-owned RevPAR owing to the coronavirus outbreak. Nonetheless, the company witnessed a sequential improvement in RevPAR in each month of third-quarter 2020.
Meanwhile, Extended Stay America’s president and CEO Bruce Haase stated, “We generated strong free cash flow and fully repaid our REIT’s outstanding revolver during the quarter. While others in the industry are forced to make difficult short-term decisions, we continue to invest in our properties, our people, and our longer-term strategies which will enable further long-term success as the lodging markets recover.”
Earnings & Revenue Discussion
During the third quarter, adjusted earnings per share of 19 cents beat the Zacks Consensus Estimate of 12 cents by 58.3%. However, the bottom line dropped 42.4% from 33 cents reported in the prior-year quarter. The downside can be primarily attributed to a decline in comparable system-wide RevPAR, partially offset by an income tax benefit, lower net interest expenses and a reduction in paired shares outstanding.
For the quarter under review, total revenues came in at $285.9 million, beating the consensus mark of $277 million by 3.2%. However, the top line declined 14.1% on a year-over-year basis primarily due to negative impacts of COVID-19.
Comparable system-wide RevPAR of $46.75 fell 14.7% on a year-over-year basis owing to a 13.7% drop in average daily rate and a 100 basis points (bps) decrease in occupancy rate.
Meanwhile, comparable company-owned RevPAR fell 15.7% to $47.76 during the third quarter, compared with $56.66 reported in the prior-year quarter.
In the quarter under review, Extended Stay’s hotel operating margin came in at 47.3%, reflecting a decline of 650 bps from the prior-year quarter primarily because of a decrease in RevPAR owing to the pandemic.
Adjusted EBITDA totaled $112.7 million, down 27.9% from the comparable year-ago period due to a decline in comparable system-wide RevPAR.
Cash and cash equivalents as of Sep 30, 2020, were $381.5 million compared with $346.8 million on Dec 31, 2019. At the end of the third quarter, total debt (net of unamortized deferred financing costs and debt discounts) amounted to $2,684 million, up from $2,639.8 million at 2019-end.
Extended Stay’s capital expenditures in the quarter under review came in at $39.6 million. Notably, renovation capital of $2.9 million and hotel development capital of $16.7 million were included in the same.
On Nov 9, the company declared a dividend payout of $0.01 to common shareholders. The dividend is payable on Dec 8, to shareholders of record at the close of business as of Nov 24, 2020. With the pandemic and business conditions improving, the company continues to review future distributions in order to maintain its REIT status.
Coming to share repurchases, the company did not repurchase any Paired Shares during the third quarter of 2020.As of Sep 30, 2020, total shares remaining under its share repurchase authorization were approximately $101.1 million.
During the third quarter, the company opened one company-owned hotel and one franchised hotel.
As of Sep 30, 2020, the company had a pipeline of 65 hotels out of which 10 hotels were company-owned and 55 hotels were third-party related. Altogether, the hotels have approximately 7,900 rooms.
For the fourth quarter of 2020, the company expects comparable system-wide RevPAR in the range of (15%) to (11%). Adjusted EBITDA is projected in the band of $78 million to $88 million. For 2020, the company expects depreciation and amortization in the range of $203 to $206 million and capital expenditures between $170 million and $190 million. Net interest expenses are estimated at $130 million. Net income for 2020 is expected in the range of $31 million to $45 million, while adjusted EBITDA is anticipated in the range of $363 million to $373 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -31.37% due to these changes.
Currently, Extended Stay America has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Extended Stay America has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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