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Does Choice Hotels International Deserve a Place in Your Portfolio?

Leading hospitality industry player Choice Hotels (CHH) achieved robust revenue and earnings growth in the past quarter and expects to further capitalize on rising consumer trends favoring leisure travel in the coming months. So, is it worth betting on the stock now, given the industry is still recovering from pandemic-led disruptions? Read on. Let's find out.

Choice Hotels International, Inc. (CHH) in Rockville, Md., is a global accommodation franchisor. As of Sept. 30, 2021, the Choice family of hotel brands had more than 7,100 hotels, representing more than 600,000 rooms in nearly 40 countries and territories. It offers business and leisure travelers a variety of high-quality lodging options that range from limited service to full-service hotels in the upscale, midscale, extended stay, and economy segments.

The stock has gained 39% in price over the past year and 22.8% over the past six months to close its last trading session at $146.68. 

The company reported strong financial performance across its business segments in its fourth quarter and fiscal 2021 results. Its domestic systemwide revenue per available room (RevPAR) growth grew by 2.2% for full-year 2021 versus 2019, exceeding full-year 2021 projections by 120 basis points and outperforming the industry by 19 percentage points.

Here's what could shape CHH's performance in the near term:

Positive developments

Last month, CHH was recognized as a Hotel Visionary Award winner in the Enterprise Innovator category by Hospitality Technology for its new revenue management system, ChoiceMAX, which builds on more than eight decades of innovation.

Also last month, Cambria Hotels, an upscale brand franchised by CHH, accelerated the brand's national development by launching eight new hotels coast to coast in 2021 and breaking ground on six additional new construction properties.

Robust Financials

During the fourth quarter, ended Dec. 31, 2021, CHH's total revenue increased 47.2% year-over-year to $284.64 million. Its operating income increased 555.4% year-over-year to $106.81 million. The company's net income grew 714.7% from the year-ago value to $64.08 million, while its EPS grew 714.3% from the prior-year quarter to $1.14.

Strong Profitability

CHH's 27% trailing-12-months net income margin is 304.7% higher than the 6.7% industry average. Also, its ROC, EBITDA margin, and ROA are 174.5%, 255.6%, and 114.5% higher than the respective industry averages. Furthermore, its $383.7 million cash from operations is 122.6% higher than the $172.34 million industry average.

Impressive Growth Prospects

The Street expects CHH's revenues and EPS to rise 12.4% and 13.5%, respectively, year-over-year to $1.2 billion and $4.87 in fiscal 2022. In addition, CHH's EPS is expected to rise at a 36.8% CAGR over the next five years. Furthermore, the company has an impressive earnings surprise history; it topped the Street’s EPS estimates in three of the trailing four quarters.

POWR Ratings Reflect Solid Prospects

CHH has an overall B grade, which equates to a Buy rating in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. CHH has an A grade for Quality and a B for Growth. CHH's solid earnings and revenue growth potential is consistent with the Quality and Growth grade.

Of the 21 stocks in the D-rated Travel – Hotel/Resorts industry, CHH is ranked #4.

Beyond what I stated above, we have graded CHH for Sentiment, Stability, Value, and Momentum. Get all CHH ratings here.

Bottom Line

With the hospitality industry rebounding from pandemic-related disruptions, CHH exhibited robust financial performance in the last reported quarter and is on track to deliver solid growth in the coming months based on rising travel and leisure demands. In addition, given the favorable analysts' sentiment and the company's fundamental strength, the stock is poised to deliver significant upside in the near term. So, we believe the stock could be a great bet now.

Note that CHH is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Growth portfolio. Learn more here.

How Does Choice Hotels International Inc. (CHH) Stack Up Against its Peers?

CHH has an overall POWR Rating of B, which equates to a Buy rating.  Check out these other stocks within the same industry: Bluegreen Vacations Holdings Cop. (BVH), which has an A (Strong Buy) rating, and Target Hospitality Corp. (TH) and Travel + Leisure Co. (TNL), which have a B (BUY) rating.

CHH shares were unchanged in premarket trading Monday. Year-to-date, CHH has declined -5.83%, versus a -7.83% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.


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