EUR 850.00 For Business Accounts Only

Morningstar | Choice Development Metrics Support Its Brand Advantage Amid Near-Term Sales Headwinds

We expect narrow-moat Choice Hotels to gradually expand room share in the hotel industry in the next decade, supported by rejuvenated Comfort brands (28% of total domestic rooms), newer Cambria and Ascend concepts (1% and 3%), and a solid loyalty program of 40 million members at the end of 2018, up about 5 million from the end of 2017. The company has a high-single-digit share of existing U.S. hotel rooms with an expanding pipeline. We see its room growth averaging near midsingle digits over the next decade, above the long-term U.S. supply growth average of 2% and the firm’s low-single-digit growth of the past few years.With all rooms franchised, Choice has an attractive recurring-fee business model with high returns on invested capital (averaging 100% over the past three years, including goodwill), as franchised hotels have low fixed costs and capital requirements. This asset-light model creates switching costs, given 20-year contracts that have meaningful cancellation costs for owners.We expect Choice’s intangible brand asset and switching cost advantage to remain intact, driven by new hotel brands, renovation of existing properties, and a sizable loyalty program. Choice’s newer Cambria and Ascend brands are experiencing healthy demand, while its Comfort brands have been successfully rejuvenated. We expect the company’s loyalty member base, which was up 5 million in 2018 to 40 million, will continue to grow.Cyclicality and overbuilding in the industry present the main risk for shareholders. Typically, U.S. lodging recoveries last seven to nine years, and 2019 represents the tenth year of this cycle. We model this U.S. cycle to last through 2019, which we believe is reasonable considering that from 2009 through 2018, U.S. demand and supply have increased around 30% and 10%, respectively, with supply growth expected to roughly match demand growth in 2019.