On Wednesday, Jefferies revised its stance on Choice Hotels International Inc . (NYSE: NYSE:CHH), moving its rating from Buy to Hold and establishing a price target of $150.00. The reevaluation comes after Choice Hotels' stock valuation adjusted following its pursuit of the WH deal. The analyst firm indicated that the current valuation of Choice Hotels appears to be balanced, with the company's stock trading at a multiple that aligns with industry standards.
The hotel franchisor's stock is evaluated in the context of its industry peers, with a particular focus on its earnings before interest, taxes, depreciation, and amortization (EBITDA) multiple compared to larger competitors. Choice Hotels currently trades at approximately 14 times its projected 2025 EBITDA, while its closest peers trade at 12.3 times and larger peers range from 15.7 to 18.1 times, with higher growth rates.
The analyst noted that Choice Hotels' growth is lower than that of larger players, with an average EBITDA increase of 8.3% versus the 31% average of its larger peers. Additionally, earnings per share (EPS) growth for Choice Hotels is projected at 9%, compared to 16-18% for larger counterparts. This disparity in growth rates has contributed to the decision to adjust the stock rating.
Another factor influencing the downgrade is the free cash flow (FCF) yield, which is considered critical for asset-light businesses that rely on capital returns. Choice Hotels' FCF yield is estimated at 4.7% based on 2025 projections, which is less favorable compared to the 6.6% yield of its closest peers.
In conclusion, the analyst from Jefferies suggests a more cautious approach to Choice Hotels' stock, given the company's solid core business in limited service and economy franchising, alongside its earlier-stage upscale segment. The current stock valuation reflects these factors, leading to the decision to downgrade the rating and set a price target that offers modest upside potential.
In other recent news, Choice Hotels International, Inc. reported a strong third-quarter performance, with significant growth in EBITDA and EPS. The company raised its full-year guidance for adjusted net income and EPS, projecting a 10% growth in adjusted EBITDA. Goldman Sachs (NYSE:GS) updated its stance on Choice Hotels, increasing the price target to $118.00 from the previous $105.00 while maintaining a sell rating. This adjustment followed the company's third-quarter financial performance, which surpassed expectations.
The global hotel pipeline of Choice Hotels expanded to over 110,000 rooms, marking an 11% year-over-year increase. The company opened 75% more hotels globally compared to the same quarter the previous year, and noted a 1.8% net increase in global rooms in more revenue-intensive brands. Despite these positive developments, Goldman Sachs expressed concern about the deceleration of the company's global pipeline for the second quarter in a row this year.
Radisson Americas reported a 10% increase in pipeline rooms, with a rise in new construction. Choice Hotels' extended-stay segment has seen growth over 10% for five consecutive quarters, with 350 hotels in the pipeline. These recent developments indicate a robust performance and potential for future growth for Choice Hotels.
InvestingPro Insights
Recent data from InvestingPro provides additional context to Jefferies' analysis of Choice Hotels International Inc. (NYSE: CHH). The company's market capitalization stands at $6.49 billion, with a P/E ratio of 27.12, reflecting the market's current valuation of the stock. Choice Hotels has demonstrated impressive financial performance, boasting a gross profit margin of 89.74% for the last twelve months as of Q3 2024, which aligns with one of the InvestingPro Tips highlighting the company's "impressive gross profit margins."
The company's revenue for the same period was $779.01 million, with a modest growth of 3.06%. This growth rate supports Jefferies' observation about Choice Hotels' lower growth compared to larger industry peers. Additionally, the dividend yield of 0.82% and the fact that Choice Hotels "has maintained dividend payments for 21 consecutive years" (another InvestingPro Tip) may appeal to income-focused investors, despite the yield being relatively low.
InvestingPro offers 7 additional tips for Choice Hotels, providing a more comprehensive analysis for investors considering the stock. To gain access to these insights and a deeper understanding of CHH's financial health and market position, readers can explore the full range of data available on InvestingPro.
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