CHH - Choice Hotels: Solid Beat-And-Raise Quarter

2023-08-09 02:57:50 ET

Summary

• Choice Hotels' Q2 2023 results surpassed the market's expectations, and the company revised its FY 2023 earnings guidance upwards.
• CHH thinks that its shares are still undervalued, and the company intends to continue with its share buybacks.
• Choice Hotels' above-expectations second quarter performance, positive full-year outlook, and attractive valuations support a Buy rating.

Elevator Pitch

I rate Choice Hotels International, Inc. ( CHH ) shares as a Buy.

I previously reviewed CHH's Q1 2023 financial results with my earlier article for the company published on May 11. In my latest update, the spotlight is on how Choice Hotels performed in the most recent quarter.

My Buy rating for Choice Hotels remains intact, as Q2 2023 was a beat-and-raise quarter for CHH and the stock is still undervalued. The recovery in travel demand for international markets and continued portfolio mix optimization are the key growth drivers for CHH in the short to medium term. CHH's key valuation metrics such as P/E and EV/EBITDA are still below their respective historical averages.

Wall Street's Expectations Of Choice Hotels' Second Quarter Performance

The analysts had predicted that CHH will register an increase in both revenue and earnings for the second quarter of 2023, prior to the company's actual results announcement on August 8.

According to the sell-side's consensus financial estimates , Choice Hotels' top line was forecasted to expand by +14.9% YoY and +27.0% QoQ to $422.7 million in Q2 2023. The market was also expecting CHH to report a second quarter non-GAAP adjusted EBITDA of $148.7 million (source: S&P Capital IQ ), which would have translated into a +39.7% QoQ growth and a +14.8% YoY increase. Wall Street's consensus numbers pointed to Choice Hotels' normalized earnings per share or EPS growing by +18.2% YoY and +50.0% QoQ to $1.69 for the recent quarter.

In the next section, I determine whether Choice Hotels' actual Q2 2023 financial performance met the Wall Street analysts' expectations.

Choice Hotels' Actual Q2 Results Beat Consensus Estimates

Choice Hotels disclosed the company's Q2 2023 financial results on Tuesday, August 8 before the market opened. CHH delivered positive top line and bottom line growth in the second quarter of the current year, and its recent quarterly financial numbers were better than the consensus forecasts.

In specific terms, CHH's actual Q2 2023 revenue, normalized EBITDA, and non-GAAP adjusted EPS exceeded their consensus financial projections by +1.1%, +3.0%, +3.7%, respectively as per S&P Capital IQ data.

The company's top line increased by +16.2% YoY to $427.4 million in the second quarter of 2023, which is the highest quarterly revenue that CHH had achieved in its history. CHH saw its non-GAAP adjusted EBITDA and normalized EPS expand by +18.2% and +22.4% to $153.1 million and $1.75, respectively on a YoY basis.

Choice Hotels' strong Q2 top line and bottom line growth in were driven by a more favorable mix. At its Q2 2023 earnings call , CHH revealed that its "domestic system size of the more revenue intense upscale, extended stay and mid-scale segments grew by 10%" YoY in the second quarter. Separately, Choice Hotels highlighted in its second quarter earnings presentation that new hotels entering the company's portfolio delivered royalty revenue that was on average +20% better than hotels which exited its portfolio in Q2.

CHH Raises Full-Year EBITDA And EPS Guidance

CHH made changes to the company's fiscal 2023 financial guidance after it reported above-expectations financial results in the second quarter of this year.

The mid-point of Choice Hotels' FY 2023 adjusted EBITDA guidance was lifted from $532.5 million previously to $535.0 million now. This implies that the company's management sees its normalized EBITDA for the current fiscal year turning out to be +12% and +43% higher than what CHH registered in FY 2022 and FY 2019 (pre-COVID), respectively.

Also, CHH revised the mid-point of its FY 2023 bottom line guidance upwards from $5.800 per share earlier to $5.935 per share currently. This suggests that Choice Hotel's normalized EPS could potentially expand by +13% in this fiscal year.

Choice Hotels noted at its most recent quarterly results briefing that the company's "effective royalty rate continues to trend above expectations" and mentioned that it is witnessing "a lot more green shoots in terms of the international portfolio." These are the key factors which drove CHH to raise its EBITDA and EPS guidance. In the preceding section, I touched on how Choice Hotels' portfolio mix has become better, and this has led to an increase in CHH's royalty fees. On the other hand, "post-pandemic revenge travel" has been supportive of hotel demand in Choice Hotels' foreign markets.

CHH's Valuations Are Still Appealing

Choice Hotels' share price rose by +2.5% on August 8, 2023 following its Q2 2023 earnings beat, and CHH's shares are up by +19.4% year-to-date.

But CHH's valuations are still pretty attractive.

Choice Hotels' key valuation metrics are below their historical averages. CHH is now trading at 14.8 times consensus forward next twelve months' EV/EBITDA (source: S&P Capital IQ ), which is lower than its five-year mean EV/EBITDA ratio of 17.4 times. Similarly, Choice Hotels' current consensus forward next twelve months' normalized P/E multiple of 21.3 times is at a discount to its five-year historical average normalized P/E metric of 25.5 times.

It is also noteworthy that CHH has the intention to continue with share repurchases on the basis that Choice Hotels' shares are undervalued. At its Q2 2023 results call, Choice Hotels emphasized that it is "still at a point where we feel like our shares continue to trade at a discount", and stressed that the company has "been pretty aggressive on the share repurchase front" which will be sustained going forward.

Concluding Thoughts

Choice Hotels' shares are still cheap based on a historical comparison, despite delivering a beat-and-raise quarter for Q2. As such, I see no reasons to change my existing Buy rating for CHH.

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