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Why Is Choice Hotels (CHH) Down 0.7% Since Last Earnings Report?

A month has gone by since the last earnings report for Choice Hotels (CHH). Shares have lost about 0.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Choice Hotels 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 catalysts.

Choice Hotels Q3 Earnings Miss Estimates, Revenues Top

Choice Hotels delivered mixed third-quarter 2023 results, with earnings missing the Zacks Consensus Estimate and revenues beating the same. Also, the top and bottom lines increased on a year-over-year basis.

The year-over-year growth is attributable to the company’s top-tier business delivery engine, synergies through the successful integration of Radisson Americas and organic growth of its brand portfolio, focused on hotels that generate higher royalties per unit. The company also aims to remain focused on its robust organic earnings growth strategy and pursue inorganic growth to drive long-term shareholder value.

Q3 Earnings and Revenues

In the quarter under review, Choice Hotels reported adjusted earnings per share (“EPS”) of $1.82, missing the Zacks Consensus Estimate of $1.87 by 2.7%. The company reported an adjusted EPS of $1.56 in the prior-year quarter.

Quarterly revenues of $425.6 million surpassed the consensus mark of $423.3 million by 0.5%. The metric rose 3% from the year-ago quarter’s level of $414.3 million.

Franchising & Royalties

During the third quarter, royalty, licensing and management fees increased 3% year over year to $148.5 million. During the quarter, domestic revenues per available room (RevPAR) decreased by 80 basis points (bps) year over year.

During the quarter, the effective royalty rate increased 6 bps year over year to 4.99%.

Operating Results

Total operating expenses during third-quarter 2023 increased 3% year over year to $290.5 million. Our estimate for the metric was $301.1 million.

During the quarter, adjusted EBITDA rose 11.8% year over year to $155.9 million. Our estimate for the metric was $157.2 million.

Balance Sheet

As of Sep 30, 2023, Choice Hotels had cash and cash equivalents of $36.4 million compared with $41.6 million as of Dec 31, 2022.

Long-term debt at the end of the third quarter was $1,391.3 million compared with $1,200.5 million reported in the 2022-end.

During the third quarter, Goodwill came in at $220.2 million compared with $218.7 million at 2022-end.

Raised 2023 Outlook

In 2023, Choice Hotels now anticipates adjusted net income in the range of $302-$308 million, up from the previous expectation of $298-$306 million.

Adjusted EBITDA is expected to be between $535 and $540 million compared with the previous expectation of $530-$540 million.

The company now expects adjusted EPS to be between $5.95 and $6.03 compared with the prior expectation of $5.86-$6.01. The Zacks Consensus Estimate for 2023 earnings is pegged at $5.99.

Domestic RevPAR growth in 2023 is estimated at approximately 1% compared with 2022. For the same period, the company’s domestic effective royalty rate is anticipated to increase in the mid-single digits on a year-over-year basis.

Other Updates

The domestic extended-stay pipeline increased 12% year over year to more than 47,000 rooms as of Sep 30, 2023. At the end of third-quarter 2023, the number of domestic hotels and rooms was more than 6,200 and 490,000, respectively. The company’s domestic pipeline reached about 86,000 rooms.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Choice Hotels has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been 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.

Performance of an Industry Player

Choice Hotels belongs to the Zacks Hotels and Motels industry. Another stock from the same industry, Hyatt Hotels (H), has gained 12.2% over the past month. More than a month has passed since the company reported results for the quarter ended September 2023.

Hyatt Hotels reported revenues of $1.62 billion in the last reported quarter, representing a year-over-year change of +5.3%. EPS of $0.70 for the same period compares with $0.64 a year ago.

For the current quarter, Hyatt Hotels is expected to post earnings of $0.38 per share, indicating a change of -85.1% from the year-ago quarter. The Zacks Consensus Estimate has changed -8.1% over the last 30 days.

Hyatt Hotels has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of D.

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