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Why Is Choice Hotels (CHH) Up 6.5% Since Last Earnings Report?

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  • CHH

It has been about a month since the last earnings report for Choice Hotels (CHH). Shares have added about 6.5% 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 its most recent earnings report in order to get a better handle on the important drivers.

Choice Hotels Q1 Earnings & Revenues Miss Estimates

Choice Hotels reported weak first-quarter 2021 results, wherein both earnings and revenues not only missed the Zacks Consensus Estimate but also declined on a year-over-year basis. The bottom line also missed the consensus mark for the fourth straight quarter.

Q1 Earnings and Revenues

The lodging franchiser reported adjusted earnings of 57 cents per share, which lagged the consensus mark of 63 cents by 9.5%. Also, the bottom line declined 25% from the prior-year quarter’s figure of 76 cents.

In the quarter under review, total revenues were $182.9 million. The top line missed the consensus mark of $201 million. Moreover, the metric declined 16% from the year-ago quarter.

Franchising & Royalties

During the first quarter, Domestic royalty fees totaled $63 million, down 5% year over year. Also, domestic system-wide RevPAR declined 4.4% and 18.7% compared with the first quarter of 2019 and 2020, respectively. Average daily rate was down 6.4%. Occupancy rose to 47.1% from 46.1% in the prior-year quarter.

The company’s new domestic franchise agreements in first-quarter 2021 were 89, up 53% year over year. Notably, more than 80% of the agreements comprised conversion hotels.
 
As of Mar 31, 2021, the number of domestic hotels and rooms rose 0.7% and 1.9% year over year, respectively.

Operating Results

Total operating expenses declined 11% to $138.9 million. Adjusted EBITDA declined 11% from the prior-year quarter’s figure to $63.1 million.

Balance Sheet

As of Mar 31, 2021, Choice Hotels had cash and cash equivalents of $223 million compared with $234.8 million on Dec 31, 2020.

Long-term debt at the end of the first quarter was $1,059.2 million, up from $1,058.7 million at 2020-end. During the quarter, goodwill, as a percentage of total assets, came in at 10% compared with 10% at 2020-end.

The company has resumed its divided and share repurchase program. It declared to pay cash dividend of $0.225 per share, payable on Jul 16 to shareholders of record on Jul 1, 2021. As of Mar 31, 2021, the company had 3.4 million shares remaining under the current share repurchase authorization.

Outlook

Thanks to the pandemic-related uncertainties, the company refrained from providing any formal guidance for the second quarter or 2021. Factors that are likely to impact future operations include resurgence in COVID-19 cases, the duration and scope of mandated travel and other restrictions, and broader macroeconomic recovery.

In April 2021, the company's RevPAR declined by nearly 4.2% compared with April 2019. However, in April 2021, occupancy levels rose by 80 basis points from April 2019.

Other Updates

The company's domestic upscale, midscale, and extended stay segments — units and rooms increased by 2.4% and 3.3% respectively, on a year-over-year basis.

During the quarter, the number of domestic hotels in the upscale segment rose 22% year over year, owing to increase in room count of 12% for the Cambria Hotels brand and 26% for the Ascend Hotel Collection.

Coming to the extended-stay portfolio, the company witnessed rapid expansion, thereby reaching 454 domestic hotels as of Mar 31, 2021. Notably, this higlighted an increase of 11% on a year-over-year basis. Meanwhile, the domestic extended-stay pipeline comprised 310 hotels awaiting conversion, under construction or approved for development.

Since Mar 31, 2020, the WoodSpring Suites, MainStay Suites as well as Suburban brands domestic hotel openings rose by 7%, 26% and 10%, respectively.

As of Mar 31, 2021, the company’s total domestic pipeline of hotels awaiting conversion, under construction or approved for development reached 943 hotels, thereby reaching nearly 77,000 rooms.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 7.73% due to these changes.

VGM Scores

At this time, Choice Hotels has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, 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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