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Here's Why Investors Should Avoid Extended Stay Stock Now

The Zacks Hotels and Motels industry has been performing reasonably well in 2019. So far this year, the industry has rallied 37.8%, compared with the S&P 500’s growth of 27.3%. However, Extended Stay America, Inc. STAY, which is part of the same industry, has had a forgettable year. This is evident from the stock’s decline of 4.8% in the same timeframe. Let’s delve deeper and analyze the factors plaguing the Zacks Rank #5 (Strong Sell) company.

Extended Stay America Vs Industry Scorecard  


Lower-than-Expected Bottom-Line Performance

Extended Stay missed the Zacks Consensus Estimate for earnings in the trailing three quarters by 4.9%, on average. In third-quarter 2019, adjusted earnings came in at 33 cents per share, lagging the Zacks Consensus Estimate of 35 cents by 5.7%. The bottom line also declined 15.4% year over year thanks to lower hotel operating margin, partially offset by reduced depreciation expenses.

Let’s look at Extended Stay earnings estimate revisions in order to get a clear picture of what analysts are thinking about the company. In the past 60 days, the Zacks Consensus Estimate for 2020 has declined by 5.8% to 97 cents.

Soft 2019 View

After reporting year-over-year decline in both top and bottom line in third-quarter 2019, the company trimmed 2019 view. Extended Stay now expects total revenues within $1,205-$1,215 million, down from $1,215-$1,230 million expected earlier. Moreover, adjusted earnings per share are likely to be in the range of 93 cents to $1.01 compared with the 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 previously.

Margin Woes Linger

Extended Stay America, which shares space with Choice Hotels International, Inc. CHH, Marriott International, Inc. MAR and Hyatt Hotels Corporation H, has been encountering increased expenses from franchise operations. The company’s hotel operating margin in third-quarter 2019 was 53.8%, reflecting a decline of 170 bps from the prior-year quarter. Increase in payroll expenses and decline in comparable system-wide RevPAR led to the downturn. Net income totaled $53.2 million compared with $75.7 million in third-quarter 2018, hihjlighting a decline of 29.7%. This downside can be attributed to decrease in comparable system-wide RevPAR and rise in operating expenses.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Choice Hotels International, Inc. (CHH): Free Stock Analysis Report
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Extended Stay America, Inc. (STAY): Free Stock Analysis Report
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