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The Hotel and Motels industry is currently grappling with the coronavirus woes. In order to mitigate the spread of the virus, companies have been adhering to temporary closures; travel restrictions; cancellation of events, conferences and meetings; social-distancing measures and other governmental regulations. Resultantly, occupancy rates and revenue per available room (RevPAR) have been negatively impacted.
Per STR, the U.S. hotel industry’s occupancy for the week ended Oct 3, 2020, came in at 47.9% compared with 48.7% for the week ended Sep 26. Meanwhile, RevPAR indicated a decline of 48.1% year over year, for the week ended Oct 3. Notably, we believe that the pandemic is likely to continue and have an adverse material impact on the hospitality industry for some time. So far this year, the Zacks Hotels and Motels industry have declined 24.2% against the S&P 500’s growth of 7.9%.
However, with cost-saving initiatives and digital enhancements in place, the industry as a whole has shown some resilience. Additionally, industry workers have implemented pay cuts, layoffs, shortened working hours and furloughs to help their companies survive amid such trying times. Hoteliers like Hyatt Hotels Corporation H, Marriott International, Inc. MAR, Choice Hotels International, Inc. CHH and Extended Stay America, Inc. STAY have been negatively impacted by the ongoing crisis.
Meanwhile, Choice Hotels and Extended Stay America have been adopting and deploying strategies to generate profits.
Let’s analyze and find out whether Choice Hotels or Extended Stay, both carrying a Zacks Rank #3 (Hold) at present, is better positioned right now. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
While shares of Choice Hotels have gained 30.3% in the past six months, Extended Stay’s shares have surged 48%.
Shares of Extended Stay are benefiting from numerous strategic efforts to revive growth. It is also refocusing on core customers instead of focusing on fleeting customers. Additionally, its initiatives toward controlling costs and decreasing the capital requirement for fresh hotel builds are commendable.
Earnings History and Projected Growth
Choice Hotels’ earnings beat the Zacks Consensus Estimate in three of the trailing four quarters and missed once. It has a trailing four-quarter negative earnings surprise of 4.8%, on average. Meanwhile, Extended Stay beat the estimates in two of the trailing four quarters, surpassed in one and matched in the other. It has a trailing four-quarter positive earnings surprise of 22.3%, on average.
Choice Hotels’ earnings for 2021 are expected to grow 51.3%, while Extended Stay’s earnings for the same period are anticipated to surge 196.4%.
Choice Hotels’ riveting growth potential depends on the continued expansion of its brands. With the constant enhancement of the mid-scale brand, along with the transformation and advancement of the Comfort and Cambria brands, the company is poised for growth.
Meanwhile, the company gains from economies of scale associated with the franchise business. Accordingly, higher fees from franchisees and transference of cost burden to franchises provide the company with operational advantages. Apart from royalty fees and procurement services revenues, Choice Hotels collects marketing and reservation system fees to provide support activities for the franchise system. Franchising, as we believe, will facilitate ROE expansion and earnings growth over the long term. Meanwhile, the company’s solid commitment toward franchisee profitability is generating incremental revenues. As of Jun 30, 2020, the company had 982 franchised hotels with 78,517 rooms under construction awaiting approval for development in its domestic system compared with 988 hotels and 78,613 rooms on Jun 30, 2019. The number of new construction franchised hotels in the company’s domestic pipeline decreased 2% to 741 on Jun 30, 2020, from 753 on Jun 30, 2019. However, the number of conversion franchised hotels in its domestic pipeline increased by six hotels (or 3%) to 241 hotels as of Jun 30, 2020, from 235 hotels reported in the prior-year quarter.
Additionally, the company relies heavily on expansion in both domestic and international markets. Despite the coronavirus pandemic, the company awarded nearly 60 and 93 new agreements in the first and second quarters of 2020, respectively.
Coming to Extended Stay, the company continues to focus on its four-pillar strategy to unlock and create shareholder value in the coming years. The first pillar is to maximize core operations and drive extended-stay demand at the company’s properties. This pillar has already shown positive results as the company’s business segment has seen a strong upward trajectory this year. The second pillar focuses on pursuing accretive asset sales for certain assets that can yield a higher value through alternative uses. The third pillar is furthering on the company’s asset-light strategy, with a focus on franchise growth. The last pillar focuses on returning capital to shareholders.
While the challenging environment has limited the company’s ability to actively pursue some of the pillars, we believe that management is focused on executing on each of these goals, which should further unlock shareholder value.
In a bid to drive growth in the long run, Extended Stay is banking on numerous strategic efforts. Notably, the company is refocusing on core customers. Also, its initiatives toward controlling costs and reducing capital requirements for fresh hotel builds are encouraging. Under its ESA 2.0 strategy, the company aims to franchise its brands and drive growth through various strategies. It also plans on enhancing its digital capabilities that would eventually boost revenues and earnings.
Moreover, the company is banking on increasing unit growth to drive RevPAR. At the end of second-quarter 2020, the company had a pipeline of 69 hotels. However, the company announced that it doesn’t expect the pipeline to increase significantly until the market conditions improve and the RevPAR level starts to rise.
Our comparative analysis shows that Extended Stay has an edge over Choice Hotels in terms of share price appreciation and projected EPS growth rate. However, the fundamentals of both companies look solid. Taking all the factors into account, we believe Extended Stay is slightly better positioned than Choice Hotels at the moment.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.