On Tuesday, Morgan Stanley (NYSE:MS) downgraded Choice Hotels (NYSE:CHH) International, Inc. (NYSE:CHH) stock from Equalweight to Underweight, adjusting the price target to $129.00 from the previous $145.00. The stock currently trades at $142.86, with a P/E ratio of 27.3x and an EV/EBITDA multiple of 17.75x. According to InvestingPro analysis, these elevated multiples suggest the stock may be trading above its Fair Value.
Stifel analysts cited several factors for the downgrade, including the company's loss of development share to larger-scale competitors and underperformance in Revenue Per Available Room (RevPAR) when compared to peers in the midscale segment due to competitive pressures.
The analysts expressed concerns about Choice Hotels' strategy of moving upstream, which has resulted in weaker free cash flow (FCF) conversion due to increased key money and capital expenditures. InvestingPro data reveals that while the company maintains impressive gross profit margins of 89.74%, its current ratio of 0.71 indicates short-term obligations exceed liquid assets, potentially supporting these concerns.
Observations were made that despite the company's revenue-intensive strategy, fee per room growth has not shown a positive change, placing the company at the lower end of its peer group for the year 2024.
Choice Hotels' stock valuation remains above the average trend-line of the previous year, with current enterprise value to EBITDA (EV/EBITDA) and price-to-earnings (P/E) ratios at approximately 14 times and 19.5 times, respectively. This is only slightly lower than its historical averages of 14.5 times and 20.5 times. The analysts noted these figures do not fully reflect the challenges of higher interest rates, slower organic room growth, and weaker FCF conversion.
Morgan Stanley revised their estimates to reflect a more challenging outlook for net unit growth, RevPAR, and royalty rate expansion. Consequently, the firm's valuation multiple for Choice Hotels was adjusted to 13.9 times from 14.7 times, based on the anticipated weaker FCF conversion.
With these adjustments, Morgan Stanley now sees an 8% downside to their new 12-month price target for Choice Hotels. For a comprehensive analysis of CHH's valuation and growth prospects, including 8 additional key insights, check out the detailed Pro Research Report available on InvestingPro.
In other recent news, Choice Hotels International, Inc. reported a substantial rise in earnings before interest, taxes, depreciation, and amortization (EBITDA) and earnings per share (EPS) in the third quarter. The company also raised its full-year guidance for adjusted net income and EPS, projecting a 10% growth in adjusted EBITDA. Furthermore, Choice Hotels expanded its global hotel pipeline to over 110,000 rooms, marking an 11% year-over-year increase.
Robert McDowell, the company's Chief Commercial Officer, is set to leave the hospitality giant in January 2025. The reasons for McDowell's departure were not specified, and no successor has been announced. Analyst firms Baird, Jefferies, and Goldman Sachs have revised their stances on Choice Hotels. Baird raised its price target for the company to $145, reflecting a positive outlook on the company's performance. In contrast, Jefferies moved its rating from Buy to Hold, and Goldman Sachs maintained a Sell rating, despite increasing the price target.
These are recent developments in the trajectory of Choice Hotels, which opened 75% more hotels globally compared to the same quarter the previous year and noted a 1.8% net increase in global rooms in more revenue-intensive brands. Despite these positive developments, Goldman Sachs expressed concern about the deceleration of the company's global pipeline for the second quarter in a row this year. Choice Hotels currently trades at approximately 14 times its projected 2025 EBITDA, while its closest peers trade at 12.3 times and larger peers range from 15.7 to 18.1 times, with higher growth rates.
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