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Choice Hotels (CHH) Up 3.9% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Choice Hotels (CHH). Shares have added about 3.9% 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 the most recent earnings report in order to get a better handle on the important drivers.

Choice Hotels Q4 Earnings Miss Estimates, Fall Y/Y

Choice Hotels reported dismal fourth-quarter 2020 results, with earnings and revenues missing the Zacks Consensus Estimate as well as declining on a year-over-year basis.

Q4 Earnings and Revenues

The lodging franchisor reported adjusted earnings of 51 cents per share, which missed the consensus mark of 66 cents by 22.7%. Also, the bottom line plunged 44.6% from the prior-year quarter’s figure of 92 cents.

In the quarter under review, total revenues came in at $193.4 million. The top line missed the consensus mark of $204 million by 5.2%. Moreover, the metric declined 27.9% from the year-ago quarter’s levels.

Franchising & Royalties

During the fourth quarter, Domestic royalty fees totaled $60.1 million, down 27% year over year. Also, domestic system-wide RevPAR declined 25.1% year over year. Average daily rate was down 12%. Occupancy fell to 44.9% from 52.8% in the prior-year quarter.

The company’s new domestic franchise agreements in 2020 came in at 427, down 38% year over year. Notably, 70% of the agreements comprised conversion hotels. As of Dec 31, 2020, the number of domestic hotels and rooms rose 0.2% and 0.4% year over year, respectively.

Operating Results

Total operating expenses declined 16% from fourth-quarter 2019 levels to $167.4 million. Adjusted EBITDA declined 34.5% from the prior-year quarter’s figure to $54.7 million.

Balance Sheet

As of Dec 31, 2020, Choice Hotels had cash and cash equivalents of $234.8 million compared with $33.8 million on Dec 31, 2019. Long-term debt at the end of the fourth quarter was $1,058.7 million, up from $844.1 million at 2019-end. During the quarter, goodwill, as a percentage of total assets, came in at 10% compared with 11.5% at 2019-end.

Due to uncertainties related to the pandemic, the company suspended payout of future dividends. As a result, total dividends paid for 2020 came in at approximately $25 million. In 2020, the management repurchased nearly $0.7 million shares (for approximately $55.5 million) under the share repurchase program. As of Dec 31, 2020, the company had 3.4 million shares remaining under the current share repurchase authorization.

2020 Highlights

Total revenues in 2020 came in at $774.1 million compared with $1,114.8 million in 2019. Adjusted EBITDA in 2020 came in at $241.1 million compared with $373.6 million in 2019. In 2020, adjusted earnings per share (EPS) came in at $2.22 compared with $4.32 in the previous year.

2021 Outlook

Thanks to the pandemic-related uncertainties, the company is not providing any formal guidance for the first quarter or 2021. Factors that are likely to make an impact in future operations include resurgence in COVID-19 cases, pace of vaccination rollout and vaccines effectiveness, the duration and scope of mandated travel and other restrictions as well as broader macroeconomic recovery. Going forward, the company will constantly monitor the situation and provide further updates based on the information then available. For the quarter ended Mar 31, 2021, the company expects sequential improvement in RevPAR. Year to date (through mid-February, 2021) RevPAR has declined approximately 18% compared with that of 2020 levels.

Other Updates

During the fourth quarter, the company awarded 195 domestic franchise agreements, of which 70% were for conversion hotels. Overall, this indicated 36% decline compared with the prior-year levels. The company's domestic upscale, midscale, and extended stay segments - units and rooms increased by 1.8% and 1.6% respectively, on a year over year basis. During the quarter, the number of domestic hotels in the midscale segment rose 1.3% year over year. In the Comfort brand segment, number of domestic hotels and rooms increased 2% year over year. Notably, the segment had more than 260 hotels in its domestic pipeline out of which 65 hotels were awaiting conversion.

Coming to the extended-stay portfolio, the company witnessed rapid expansion, thereby reaching 447 domestic hotels as of Dec 31, 2020. Notably, this suggested an 11% increase on a year-over-year basis. Meanwhile, the domestic extended-stay pipeline comprised of 315 hotels awaiting conversion, under construction or approved for development. In the MainStay Suites segment, domestic hotels rose 23% on a year-over-year basis. Notably, the segment witnessed highest number of hotel openings in 2020. Meanwhile, the Suburban brand witnessed 40% year-over-year growth in domestic franchise agreements. The Cambria Hotels brand witnessed rise in number of domestic hotels and rooms by 8% and 6%, respectively, from 2019 levels. As of Dec 31, the brand's pipeline comprised nearly 80 domestic hotels, of which 19 hotels were under active construction. As of Dec 31, the company’s total domestic pipeline of hotels awaiting conversion, under construction or approved for development reached 966 hotels, thereby reaching nearly 80,000 rooms.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

Currently, Choice Hotels has a subpar Growth Score of D, a grade with the same score on the momentum front. 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 D. 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. 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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