Why Is Choice Hotels (CHH) Down 49.8% Since Last Earnings Report?

It has been about a month since the last earnings report for Choice Hotels (CHH). Shares have lost about 49.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Choice Hotels due for a breakout? 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 & Revenues Beat Estimates

Choice Hotels reported better-than-expected fourth-quarter 2019 results. The top and the bottom line surpassed their respective Zacks Consensus Estimate and increased on a year-over-year basis. The upside can be primarily attributed to increased domestic franchise agreements, solid progress on its flagship Comfort brand and continued expansion of its Cambria brand across the country.

The lodging franchisor reported adjusted earnings of 92 cents per share, which beat the consensus mark of 84 cents and rose 4.5% year over year. Notably, this marked the eighth straight quarter of earnings beat.

In the quarter under review, total revenues came in at $268.1 million. The figure increased 9% from the year-ago quarter’s level and topped the consensus mark of $258 million.

Let’s discuss the quarterly numbers.

Franchising & Royalties

Domestic royalty fees totaled $82.3 million, up 2.5% year over year. However, domestic system-wide RevPAR dropped 2.1% year over year. Average daily rate (ADR) inched down 0.4% and occupancy was down 100 basis points compared with the prior-year quarter’s level.

The company’s newly-executed domestic franchise agreements were 307 in the fourth quarter. As of Dec 31, 2019, the number of domestic hotels and rooms rose 1.6% and 2.9% year over year, respectively.

Operating Results

Total operating expenses increased 5.7% from fourth-quarter 2018 to $199.5 million. Adjusted EBITDA also increased 6.3% from the prior-year quarter’s number to $81 million.

Balance Sheet

As of Dec 31, 2019, the company had cash and cash equivalents of $33.8 million compared with $26.6 million on Dec 31, 2018.

Long-term debt in the same period was $844.1 million, up from $753.5 million at 2018-end. Goodwill, as a percentage of total assets, was 11.5% at the end of the fourth quarter compared with 14.8% at 2018-end.

In 2019, Choice Hotels paid out cash dividends of $48 million. In 2020, the company expects to pay dividends worth approximately $50 million. Meanwhile, management repurchased roughly $0.6 million shares for nearly $50.6 million under the share repurchase program during 2019. As of Dec 31, 2019, the company had 3.9 million shares remaining under the current share repurchase authorization.

2019 Highlights

In 2019, total revenues amounted to $1.1 billion, up 7% year over year.

Adjusted earnings per share (EPS) for the year ended Dec 31, 2019 was reported at $4.32 compared with $3.89 in 2018.

Adjusted EBITDA amounted to $364.9 million, up 7% from 2018 levels.

First-Quarter 2020 Guidance

For first-quarter 2020, adjusted EPS are anticipated in the range of 80-84 cents. Its mid-point of 82 cents is above the current Zacks Consensus Estimate of 81 cents. Domestic RevPAR is expected between flat to down 2% for first-quarter 2020.

2020 Guidance

For 2020, Choice Hotels expects adjusted EPS in the range of $4.22-$4.33. Adjusted EBITDA is expected between $378 million and $385 million. Net domestic unit growth for 2020 is expected to range between 1.5% and 2.5%. The company expects full year adjusted net income between $237 million and $244 million.

Domestic RevPAR is expected to be between flat to down 2% for 2020.
The company's domestic effective royalty rate is expected to increase in the range of 4-8 basis points for 2020 from 2019 levels.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision flatlined during the past month.

VGM Scores

At this time, Choice Hotels has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Choice Hotels has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.