Continual Franchising To Aid Choice Hotels (CHH) Q4 Earnings

Choice Hotels International, Inc. (NYSE:CHH) is scheduled to report fourth-quarter 2018 numbers on Feb 15, before the market opens.

The company’s continual strategy of unit expansion through acquisition is likely to have aided fourth-quarter revenues while the constant focus on developing the franchise business is expected to have bolstered bottom-line growth in the to-be-reported quarter.

Backed by an impressive earnings trend, shares of Choice Hotels have gained 1.5% over the past year against the industry’s collective decline of 23%.

Top Line to Gain From Continual Expansion

In the first nine months of 2018, Choice Hotel’s total revenues increased 11% year over year. We expect the upside trend to have continued in the to-be-reported quarter. The upside is driven by continual expansion strategies through acquisitions and franchise agreements. The Zacks Consensus Estimate for overall revenues in the fourth quarter is pegged at $263 million, reflecting 10.7% growth from the year-ago quarter.

Choice Hotels relies heavily on expansion in domestic and international markets. Apart from constant franchise expansion, the company recently added 239 extended-stay hotels in 35 states to its portfolio through the acquisition of Woodspring Suites. Choice Hotels expects to witness Woodspring having 250 hotels by the beginning of 2019. In the first nine months of 2018, Choice Hotels opened 11 WoodSpring hotels in top markets like Chicago, Seattle, Charlotte and Detroit. Choice Hotels expects unit growth to accelerate in 2019.

In the fourth quarter, the company finalized an agreement with a developer to build more than 20 additional WoodSpring Suites over the next 4 years. Net domestic unit growth is expected to be 7-8%for 2018.

Bottom-Line Picture Impressive

Choice Hotels gains from economies of scale associated with the franchise business. Accordingly, higher fee from franchisees and transference of cost burden onto franchises provide the company with operational advantages. Apart from royalty fees and procurement service revenues, Choice Hotels collects marketing and reservation system fees to support activities for the franchise system. Franchising, as we believe, will facilitate ROE expansion and earnings growth.

For the fourth quarter of 2018, the company expects earnings of 78-85 cents. The consensus estimate also pegs earnings at 83 cents for the quarter, suggesting 31.8% growth from the year-ago quarter.

What Does the Zacks Model Unveil?

Our proven model does not predict that Choice Hotels is likely to beat earnings estimates in fourth-quarter 2018. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

This hotelier has an Earnings ESP of 0.00%. Presently, the company carries a Zacks Rank #3.

Choice Hotels International, Inc. Price and EPS Surprise

Stocks Poised to Beat Earnings Estimates

Here are some stocks from the Consumer Discretionary sector that investors may consider as our model shows that these have the right combination of elements to come up with an earnings beat in the to-be-reported quarter:

SeaWorld (NYSE:SEAS) has an Earnings ESP of +38.46% and it currently sports a Zacks Rank #1. The company is scheduled to report quarterly numbers on Feb 28.

Live Nation (NYSE:LYV) has an Earnings ESP of +4.42% and a Zacks Rank #3.

Clarus Corporation (NASDAQ:CLAR) has an Earnings ESP of +7.69% and a Zacks Rank #1.You can see the complete list of today’s Zacks #1 Rank stocks here.

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