A month has gone by since the last earnings report for Extended Stay America (STAY). Shares have lost about 7.5% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Extended Stay America due for a breakout? 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 Q2 Earnings Top, RevPAR Growth Continues
Extended Stay America reported better-than-expected earnings for the third straight quarter, when it posted second-quarter 2018 financial numbers.
Adjusted earnings came in at 35 cents per share outpacing the Zacks Consensus Estimate of 34 cents. The bottom line also grew 12.9% year over year backed by a decrease in effective tax rate and lower depreciation expenses.
Detailed Revenue Discussion
Total revenues of $336.5 million in the second quarter marginally came ahead of the consensus mark of $336.3 million. However, the metric declined 0.6% on a year-over-year basis. This downside can be attributed to continual hotel disposition by the company as a part of its strategic efforts for boosting long-term growth. The decline was partially overshadowed by increase in RevPAR franchise and management fee revenues. On a comparable basis, total revenues rose 1.8% in second-quarter 2018.
Company-owned hotel RevPAR improved 1.7%.In the quarter under review, comparable system-wide RevPAR increased 1.6% on a year-over-year basis. The uptick was owing to a 3.4% improvement in average daily rate (ADR), partially offset by a 130 basis point (bps) decline in occupancy to 77.6%. Also, comparable company-owned hotel RevPAR rose 2.4% to $54.27 driven by an ADR increase of 4%.
Behind the Headlines
Hotel Operating margin in the quarter was 56.4%, a 30-bps decline from the prior-year quarter. Net income totaled $65.6 million compared with $49.7 million in the same period in 2017. The metric in the second quarter was favorably impacted by a lower effective tax rate, lower depreciation and amortization, decline in hotel operating expenses as well as reduced impairment charges.
Other Financial Details
Cash and cash equivalents as of Jun 30, 2018, was $183.2 million compared with $113.3 million at the end of Dec 31, 2017. Total shareholders’ equity at the end of the second quarter was $1,294.6 million. As of Jun 3, 2018, total debt (net of unamortized deferred financing costs and debt discounts) amounted to $2,480.1 million, down from $2,541.9 million at the end of Dec 31, 2017.
Extended Stay invested roughly $56.2 million in capital expenditures in the quarter under review. This investment included approximately $14.6 million in capital expenditures for new hotel development and $14.9 million for IT projects. On Jul 25, the company’s board of directors announced cash distributions totaling 22 cents per share. The distributions are payable Aug 23, 2018 to shareholders of record as of Aug 9, 2018. Extended Stay also repurchased 1.6 million shares for an aggregate purchase price of $32.8 million during the quarter.
For 2018, Extended Stay expects room and other hotel revenues to be in the range of $1.257-$1.279 billion compared with $1.26-$1.28 billion guided earlier. Comparable system-wide RevPAR is envisioned in the 1-2.75% band. Adjusted EBITDA is projected between $595 million and $610 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, Extended Stay America has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile 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.
Our style scores indicate that the stock is more suitable for value investors than growth investors.
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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