Choice Hotels (CHH) Gains 7% In 1 Year: More Room For Growth?

Choice Hotels International, Inc. (NYSE:H) relies on continual expansion and acquisitions to drive growth. However, intense competition and higher costs of operations have been concerning.

The company’s portfolio of well-segmented brands along with the WoodSpring acquisition poses it for long-term growth. Backed by strong brand presence, shares of Choice Hotels have gained 6.5% in the past year against the industry’s decline of 10.6%.

Let us delve deeper into the reasons that suggest that you should hold on to the stock for the time being.

Expansion — Key Growth Driver

Choice Hotels relies heavily on expansion in domestic as well as international markets. In the first quarter of 2019, this hotelier awarded 79 total franchise agreements. Alongside domestic growth, the company continues to expand its international footprint in new countries. Key international operating markets include Spain, Colombia, Panama, the Caribbean and Canada.

Moreover, Choice Hotels recently strengthened its presence, with the launch of Clarion Pointe. Expansion of the brand is expected to occur through 21 Clarion Pointe franchise agreements. Meanwhile, in the last year, the company announced an alliance with Sercotel, a leading hotel operator and franchisor based in Spain. This alliance will enable the extension of Choice Hotels’ global footprint in Spain and other markets as well as the creation of opportunities for additional hotel development across Europe and Latin America.

The company’s 99% of revenues are generated from the franchise business. Choice Hotels gains from economies of scale associated with the franchise business. Franchising, as we believe, will facilitate ROE expansion and earnings growth over the long term. In 2018, hotel franchising revenues increased 12% year over year. Hotel franchising revenues improved 4.6% year over year in the first quarter of 2019. The number of domestic franchised hotels and rooms as of Dec 31, 2018, increased 6.6% and 9%, respectively, from the year-ago levels.

Apart from constant franchise expansions, Choice Hotels has added 239 extended-stay hotels in 35 states to its portfolio through the acquisition of Woodspring Suites in the past year. In 2018, the company completed the opening of additional 12 WoodSpring hotels in top markets like Chicago, Seattle, Charlotte and Detroit. Further, growth is expected to accelerate in 2019, with expected opening of additional 20 hotels.

Concern

Despite the positive synergies to be realized from acquisitions and increased focus on franchising, the company is shouldering high costs of operations. Total operating expenses in 2018 increased 20.1% year over year.

Meanwhile, Choice Hotels is continuously facing intense competition from large hotel chains like Marriott (NASDAQ:MAR) , Hilton (NYSE:HLT) and Hyatt (NYSE:H) and smaller independent local hospitality providers. Increasingly, the company also faces competition from new channels of distribution in the travel industry. Unless it counters these competitions with appropriate strategies, it may pose a concern for its future profitability.

Choice Hotels currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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