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Morningstar | Choice's Brand Advantage Sustained, Despite Temporary Headwinds Impacting Its revPAR

We don't plan a material change to our $84 valuation after Choice Hotels reported a weaker U.S. revPAR drop of 1.4% versus 0%-1.5% growth guidance due to temporary factors (weather, renovation, and calendar), offset by solid royalty rate and development growth. Shares are slightly undervalued, trading around 13.5 times 2019 EV/EBITDA. But we prefer Wyndham that trades near 11 times next year EV/EBITDA while offering similar high-single-digit annual organic EBITDA growth over the next five years.

Choice noted that weather, calendar, and Comfort brand renovations created a 30-basis-point, 20-basis-point, and 60-basis-point headwind to the reported 1.4% revPAR decline reported in the quarter. We note that even adjusting for those temporary items that revPAR was well below Wyndham's U.S. 2.4% revPAR growth figure this quarter. With Choice's revPAR up 1.4% year to date and guidance for 1%-3% lift in the fourth quarter, we plan to lower our 2.5% 2018 estimate toward 2%.

Still, Choice's brand advantage (source of its narrow moat) is intact, as it grew its loyalty program 4 million to 39 million members (versus Wyndham's roughly 70 million) and saw royalty rates lift 12 basis points to 4.72%. Further, room growth rose 8%, aided by the WoodSpring acquisition and demand for existing brands. For instance, the Clarion Pointe brand, a midscale select-service concept, already has 75 units in the pipeline after its launch in September, and we believe it can grow to around 300 units over the next few years. Lifestyle brands Cambria and Ascend (4.5% of total rooms) saw 30% unit growth. Additionally, 40% of Comfort brand (29%) hotels will be renovated by the end of 2018, and the updated versions saw revPAR 80 basis points above the market rate, supporting the long-term brand advantage. As a result, we plan to maintain our 2018 3.2% organic room growth (near management's 3% target) with an acceleration to just above 4% annually in 2019-22.