Here's Why Investors Should Avoid Extended Stay Stock Now

The Zacks Hotels and Motels industry has been performing reasonably well in 2019. So far this year, the industry has rallied 37.8%, compared with the S&P 500’s growth of 27.3%. However, Extended Stay America, Inc. (NASDAQ:STAY) , which is part of the same industry, has had a forgettable year. This is evident from the stock’s decline of 4.8% in the same timeframe. Let’s delve deeper and analyze the factors plaguing the Zacks Rank #5 (Strong Sell) company.

Extended Stay America Vs Industry Scorecard

Lower-than-Expected Bottom-Line Performance

Extended Stay missed the Zacks Consensus Estimate for earnings in the trailing three quarters by 4.9%, on average. In third-quarter 2019, adjusted earnings came in at 33 cents per share, lagging the Zacks Consensus Estimate of 35 cents by 5.7%. The bottom line also declined 15.4% year over year thanks to lower hotel operating margin, partially offset by reduced depreciation expenses.

Let’s look at Extended Stay earnings estimate revisions in order to get a clear picture of what analysts are thinking about the company. In the past 60 days, the Zacks Consensus Estimate for 2020 has declined by 5.8% to 97 cents.

Soft 2019 View

After reporting year-over-year decline in both top and bottom line in third-quarter 2019, the company trimmed 2019 view. Extended Stay now expects total revenues within $1,205-$1,215 million, down from $1,215-$1,230 million expected earlier. Moreover, adjusted earnings per share are likely to be in the range of 93 cents to $1.01 compared with the prior projection of $1-$1.10. Capital expenditure for the year is anticipated in the band of $235-$275 million, down from $270-$320 million expected previously.

Margin Woes Linger

Extended Stay America, which shares space with Choice Hotels International, Inc. (NYSE:CHH) , Marriott International, Inc. (NASDAQ:MAR) and Hyatt Hotels Corporation (NYSE:H) , has been encountering increased expenses from franchise operations. The company’s hotel operating margin in third-quarter 2019 was 53.8%, reflecting a decline of 170 bps from the prior-year quarter. Increase in payroll expenses and decline in comparable system-wide RevPAR led to the downturn. Net income totaled $53.2 million compared with $75.7 million in third-quarter 2018, hihjlighting a decline of 29.7%. This downside can be attributed to decrease in comparable system-wide RevPAR and rise in operating expenses.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.

See the pot trades we're targeting>>