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Here's Why You Should Steer Clear of Extended Stay America

Zacks Equity Research

Extended Stay America, Inc. STAY has been bearing the brunt of increased expenses, which have been hurting its margins of late. Also, the company’s lack of exposure in international markets might limit its revenue growth potential. Furthermore, low corporate demand is likely to continue hurting its performance.

Shares of Extended Stay America have lost 5.7% so far this year against the industry’s rally of 16.9%.

 

 

Let us find out why the company is not a suitable choice for investors at the moment.

Dismal Performances & Downward Estimate Revision

Extended Stay America’s earnings and revenues in the second quarter of 2019 raised investors’ apprehension. In the second quarter of 2019, its adjusted earnings were 32 cents per share, missing the Zacks Consensus Estimate by a cent. The bottom line also declined 8.6% year over year due to lower hotel operating margin.

Further, its total revenues declined 3.8% on a year-over-year basis due to asset dispositions. Over the past two months, earnings estimates for the current year have moved down 3.8%, reflecting analysts’ concerns surrounding the company’s earnings potential.

Meanwhile, the company’s earnings for 2019 are expected to decline 7.9% while its revenues are likely to decrease 4.3% on a year-over-year basis.

Suspension of Share Buybacks

Extended Stay America had an impressive history of share repurchases. In 2018, it repurchased 4.3 million shares for aggregate purchase price of $85.3 million. In 2017, the company repurchased 3.6 million shares for $62.3 million. However, starting from the first quarter of 2019, the company suspended its share repurchase. Its buyback program is expected to remain off the hook due to other potential opportunities. This has not been accepted by investors well. Subsequently, the company’s shares have declined largely over the past three months.

Margin Continues to Decline

Extended Stay America has been facing increased expenses from its franchise operations. The company’s hotel operating margin in the second quarter of 2019 was 54.4%, reflecting a 200-bps decline from the prior-year quarter. Increase in payroll expenses and decline in comparable system-wide RevPAR led to the downturn. Net income totaled $59.7 million compared with $65.6 million in second-quarter 2018, mirroring a 9% decline. This downside can be attributed to the decrease in comparable system-wide RevPAR and rise in operating expenses.

Zacks Rank & Stocks to Consider

Extended Stay America currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the industry are Choice Hotels CHH, Huazhu Group HTHT and Wyndham Destinations WYND, each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Choice Hotels, Huazhu Group and Wyndham Destinations’ earnings over the long-term are expected to rise 9.9%, 12.7% and 4%, respectively.

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