EUR 850.00 For Business Accounts Only

Morningstar | Choice Hotels' Development Supports Brand Advantage Amid Near-Term Top-Line Headwinds

Narrow-moat Choice Hotels' 0.7% decline in U.S. revenue per available room missed its flat guidance, as more Comfort hotels were under renovation than expected (a surprise, given the visibility on location updates). Excluding renovation and expected government shutdown and tough year-ago comparison headwinds, Choice’s revPAR grew around 1%, closer to the 1% lift narrow-moat peer Wyndham reported. As a result, Choice lowered its 2019 U.S. revPAR forecast to 0%-1% from 0.5%-2% versus our 1.2% estimate, which we plan to lower closer to 0.5%. This compares with Wyndham’s maintained revPAR forecast of 1%-3%.

While near-term revPAR is a bit weaker than expected, Choice’s development metrics support its intangible brand advantage. Choice’s U.S. unit growth was 1.8% (Wyndham posted 3% growth) and the company maintained guidance for a 2%-3% increase (Wyndham maintained its outlook for 2%-4% room growth in 2019), which tracks with our unchanged 2.5% forecast. Choice’s U.S. pipeline grew 7% and amounts to 78,000 rooms in total, 17% of its existing base (Wyndham’s pipeline represents 22% of its existing base), supporting our view of 3.5% average annual growth over the next 10 years, above the 2% long-term supply growth average in the U.S. industry.

Many of Choice’s brands are performing well. Comfort (28% of total U.S. rooms) renovated hotels posted 1% revPAR growth, 40 basis points higher than the midscale segment where it competes. Extended-stay brand WoodSpring (7%), saw a 7.3% revPAR increase excluding last year’s hurricane benefit. Lifestyle brands Cambria and Ascend (5% combined) saw 12% room growth.

We don’t plan any material change to our $85 fair value estimate, leaving the shares fairly valued at 15.5 times 2019 enterprise value/EBITDA. We prefer Wyndham, which offers similar high-single-digit average annual sales and EBITDA growth over the next five years, yet trades at 12 times 2019 EV/EBITDA and an attractive margin of safety to our $74 fair value estimate.

Choice expanded its vacation rental exposure through a partnership with AMResorts and its 50 all-inclusive vacation resorts. In total, Choice's vacation rental partners include 34,000 units across 40 markets that can be offered to its hotel loyalty members, thereby enhancing its value.