Why Is Extended Stay America (STAY) Down 2.3% Since Last Earnings Report?

It has been about a month since the last earnings report for Extended Stay America (STAY). Shares have lost about 2.3% 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 the most recent earnings report in order to get a better handle on the important drivers.

Extended Stay Reports Q3 Earnings Miss Estimates

Extended Stay America reported mixed third-quarter 2019 results, wherein earnings lagged the Zacks Consensus Estimate but revenues beat the same. However, both the top and bottom lines decreased on a year-over-year basis due to decline in hotel operating margin and comparable company-owned RevPAR.

Adjusted earnings during the quarter were 33 cents per share, missing the Zacks Consensus Estimate of 35 cents by 5.7% and declining 15.4% year over year. The downside was mainly due to lower revenues and hotel operating margin, partially offset by reduced depreciation expenses.

Detailed Revenue Discussion

Extended Stay reported total revenues of $332.7 million in the quarter, marginally surpassing the Zacks Consensus Estimate of $331 million. However, the reported figure declined 5.2% from year-ago figure of $351.1 million due to asset dispositions in 2018 and a decline in comparable company-owned RevPAR. When adjusted for asset disposition, its revenues fell 0.6% from the prior year.

Comparable system-wide RevPAR of $54.81 fell 1.3% on a year-over-year basis, owing to a 2% drop in average daily rate (ADR), offset by an increase of 70 basis points (bps) in occupancy.

Meanwhile, total company-owned RevPAR rose 1.1% from the prior-year quarter, whereas comparable company-owned RevPAR declined 1.4% to $56.66.

Behind the Headlines

In the quarter under review, Extended Stay’s hotel operating margin came in at 53.8%, reflecting a 170 bps decline from the prior-year quarter. Increase in hotel payroll and property insurance expenses, and property taxes, along with a decline in comparable company-owned RevPAR resulted in the downturn.

Adjusted EBITDA totaled $156.3 million, down 10% from the comparable year-ago period due to the above-mentioned headwinds.

Cash and cash equivalents as of Sep 30, 2019 was $489.8 million compared with $287.5 million on Dec 31, 2018. At the end of the third quarter, total debt (net of unamortized deferred financing costs and debt discounts) amounted to $2,639.5 million, up from $2,402.6 million at 2018-end.

Extended Stay invested $65.1 million in capital expenditures in the quarter under review. On Nov 6, the company’s board of directors announced cash distributions totaling 23 cents per share, payable on Dec 4, 2019 to its shareholders of record as of Nov 20, 2019. The company repurchased 4 million shares during the reported quarter for an aggregate purchase of $57.5 million and an additional 2 million shares for $28.8 million. At the end of the third quarter, total shares remaining under its share repurchase authorization were approximately $177 million.

Lowered 2019 View

Extended Stay now expects total revenues within $1,205-$1,215 million, down from $1,215-$1,230 million expected earlier. Moreover, comparable system-wide RevPAR is envisioned to be down 1.75-1.25% compared with a decline of 1-5% expected previously.

Adjusted EBITDA is projected between $535 million and $545 million, down from $550-$565 million projected earlier. Adjusted earnings per share are likely to be between 93 cents and $1.01 versus prior projection of $1-$1.10. Capital expenditure for the year is anticipated in the band of $235-$275 million, down from $270-$320 million expected earlier.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -23.93% due to these changes.

VGM Scores

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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Extended Stay America has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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