Choice Hotels Gains From WoodSpring Buyout Amid Competition

Choice Hotels International, Inc. (NYSE:CHH) continues to gain from expansion strategies and a portfolio of well-segmented brands. With continuous enhancement of the mid-scale brand and the acquisition of the WoodSpring brand, the company is poised for growth in 2019. However, high cost of operations and intense competition are concerning.

In the first quarter of 2019, Choice Hotels’ earnings surpassed the Zacks Consensus Estimate. Further, its earnings also met/surpassed analysts’ expectations for 12 straight quarters. For 2019, the company expects earnings per share to be $4.06-$4.18, whereas the Zacks Consensus Estimate for the same is pegged at $4.17.

Backed by such robust earnings trend, shares of Choice Hotels have gained 6.5% in the past year against the industry’s decline of 11.1%.

Expansion — Major Growth Driver

Choice Hotels relies heavily on expansion in both domestic as well as international markets. In the first quarter of 2019, this hotelier awarded 79 total franchise agreements. Alongside domestic growth, the company continues to expand its international footprint in new countries. Key international operating markets include Spain, Colombia, Panama, the Caribbean and Canada.

The company’s 99% of revenues are generated from the franchise business. Choice Hotels gains from economies of scale associated with the franchise business. The company’s solid commitment toward franchisee profitability is driving incremental revenues. In 2018, hotel franchising revenues increased 12% year over year, whereas the same improved 4.6% year over year in the first quarter of 2019. The number of domestic franchised hotels and rooms as of Dec 31, 2018, increased 6.6% and 9%, respectively, from the year-ago levels.

Apart from constant franchise expansions, Choice Hotels has added 239 extended-stay hotels in 35 states to its portfolio through the acquisition of Woodspring Suites in the past year. In the first quarter of 2019, Choice Hotels entered a multi-unit franchise agreement with a hotel management company to develop 14 WoodSpring hotels throughout the Western states of Colorado, Arizona and Nevada. In the first quarter, the WoodSpring Suites pipeline grew 22% over the prior-year period. This brings the brand's pipeline to over 110 properties.

Addition of the Woodspring brand has been of vital importance. Since addition, WoodSpring’s website revenue delivery has increased 24%, its call center conversion rates moved up 5.5% and corporate account business delivery increased 18%.

Concerns

Despite the positive synergies to be realized from acquisitions and increased focus on franchising, Choice Hotels is shouldering high costs from operations. Total operating expenses in 2018 increased 20.1% year over year.

Meanwhile, the company is continuously facing intense competition from large hotel chains like Marriott (NASDAQ:MAR) , Hyatt (NYSE:H) and Hilton (NYSE:HLT) ; and smaller independent local hospitality providers. Unless it counters these competitions with appropriate strategies, it may pose a concern for its future profitability.

Choice Hotels currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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