Extended Stay America Banks On Unit Expansion For Growth

Shares of Extended Stay America, Inc. (NASDAQ:STAY) are riding high on impressive earnings trend, robust revenue per available room (ReVPAR), unit growth and numerous efforts. Consequently, in the past three months, the stock has increased 16.3% compared with the industry’s 15.2% rally. However, the lack of international market exposure, intense competition from larger hotel chains and alternative hospitality service providers might hurt the company’s performance.

Catalysts Driving Growth

The company is highly concentrating on expansion by focusing on the core customers to fortify brand presence and drive revenue growth. It is also focusing on unit growth. By 2021, the company’s portfolio will likely have 700 Extended Stay America branded properties, out of which nearly 70% will be owned or operated, and 30% will be franchised. Moreover, it witnessed growth of over 60% in total pipeline in 2018.

Extended Stay America’s efforts to drive ReVPAR by providing suitable services to value-conscious business travelers are encouraging. In 2017, its ReVPAR increased 1.7%, owing to 1.1% growth in Average Daily Rate (ADR) and expansion of 40 basis points (bps) in occupancy. The trend continued in 2018, with RevPAR witnessing comparable system-wide growth of 2%.

Moreover, in order to enhance shareholder value, Extended Stay America consistently increases share repurchase authorization. In the fourth quarter, it repurchased 0.3 million shares for an aggregate purchase price of $5.7 million. In 2018, it repurchased 4.3 million shares for $85.3 million. In 2017, Extended Stay America repurchased 3.6 million shares for $62.3 million.

The aforementioned factors helped the company to report better-than-expected earnings in 11 out of the preceding 13 quarters. In fourth-quarter 2018, its earnings were 21 cents, beating the consensus mark by a penny.

Concerns

Extended Stay America’s lack of exposure in international markets might limit revenue growth potential. In addition, low corporate demand is likely to continue hurting its performance.

In order to get a clear picture of what analysts are thinking about the company, let’s look at earnings estimate revisions for Extended Stay America. In the past 30 days, the Zacks Consensus Estimate for the current quarter and 2019 has moved south by 10.5% and 1.8% to 17 cents and $1.10, respectively. For 2020, the consensus mark has moved down by 5 cents to $1.15 in the same time frame.

Zacks Rank & Stocks to Consider

Extended Stay currently carries a Zacks Rank #3 (Hold).

A few better-ranked restaurant stocks in the same space are Hilton Worldwide Holdings Inc. (NYSE:HLT) , China Lodging Group, Limited (NASDAQ:HTHT) and Red Lion Hotels Corporation (NYSE:RLH) . While Hilton currently flaunts a Zacks Rank #1 (Strong Buy), China Lodging Group and Red Lion Hotels carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Earnings for Hilton, China Lodging Group and Red Lion Hotels for 2019 are projected to increase 36.6%, 31% and 95.6%, respectively.

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