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Elevator Pitch
Choice Hotels International, Inc. (NYSE:CHH) shares are assigned a Buy investment rating. Earlier, I wrote about CHH’s 2024 financial outlook in my previous update published on October 10, 2023.
This article highlights Choice Hotels’ recent positive developments that investors should consider. Firstly, CHH is no longer pursuing an acquisition of Wyndham Hotels & Resorts (WH). Secondly, Choice Hotels has recently announced an expansion of the company’s share buyback plan. Thirdly, the company is growing its midscale extended stay brand Everhome Suites’ footprint in new markets.
I retain a Buy rating for Choice Hotels in view of these favorable developments.
Overhang Relating To Proposed M&A Deal Has Been Removed
CHH previously published a press release on October 17, 2023 revealing that it has made “a proposal to acquire all the outstanding shares of Wyndham Hotels & Resorts.” Choice Hotels’ shares fell by -6.8% on the day of the M&A deal announcement and subsequently dropped to a 52-week trough of $108.91 during intra-day trading on March 5, 2024. It is worthy of note that Wyndham Hotels’ board of directors didn’t support the deal.
But Choice Hotels’ stock price eventually rose by +4.7% at the end of the March 5, 2024 trading day. On that day, Seeking Alpha News reported that CHH “will either decide to extend or terminate the merger offer” after considering “the level of participation in the tender offer” for WH’s shares.
A subsequent March 11, 2024 Seeking Alpha News article highlighted that CHH had “ended its hostile attempt for an $8 billion takeover of Wyndham Hotels.” The sell side analysts from Jefferies (JEF) and Baird raised their respective investment ratings for Choice Hotels on the same day in response to the termination of the company’s planned acquisition. Notably, Choice Hotels’ share price rose by +5.6% to close at $127.77 on March 11, or +17.3% above its 52-week low.
Previously, the market was likely to have been concerned that CHH could be embroiled in a long-drawn battle for the control of WH at the expense of other capital allocation alternatives and organic growth plans. This provides an explanation for Choice Hotels’ prior share price weakness which led the stock to drop to a 52-week trough in early March.
As such, Choice Hotels’ decision to move away from this planned takeover of WH is a positive development.
Recent Buyback Plan Expansion Announcement Is A Positive
On March 11, 2024, Choice Hotels announced “an increase in the number of shares authorized under its share repurchase program” by “five million shares” to “6.8 million shares.”
Last year, CHH spent $366 million buying back 2.9 million of the company’s shares, which left it with 1.8 million shares remaining from its share buyback authorization at the end of 2023. Therefore, it was highly likely that Choice Hotels would have returned much less capital to its shareholders via share repurchases this year, assuming that it continued with the WH deal and set aside capital for this potential transaction.
Now, it is clear that the company is focusing its attention on other value-accretive capital allocation opportunities, as it moves on from the potential Wyndham Hotels M&A deal.
Choice Hotels has guided for a +5.6% growth in its normalized earnings per share or EPS from $6.11 for FY 2023 to $6.45 (mid-point of guidance) in FY 2024. In its Q4 2023 earnings press release, CHH noted that its FY 2024 guidance does not incorporate the effects of “additional repurchases of company stock” among other factors. In other words, there is potential upside pertaining to Choice Hotels’ actual bottom line performance this year, if it repurchases more of its own shares under the expanded share buyback plan.
Growth Potential Associated With New Brand Draws Attention
In early March this year, Choice Hotels issued a media release disclosing “the opening of Everhome Suites in Newnan, Georgia, marking the midscale extended stay brand’s debut on the East Coast.”
An Overview Of The Everhome Suites Brand
Everhome Suites Brand Factsheet
Everhome Suites is the latest brand that the company has added to its portfolio at the beginning of 2022, and this brand has huge growth potential.
In 2023, the total number of units in CHH’s portfolio increased by +1.8%, while the extended stay segment’s number of units grew by a much better +14.9% in the previous year. Moving forward, Choice Hotels anticipates that its extended stay segment can achieve a +15% unit CAGR for the FY 2024-2028 time frame as per its management commentary at the Q4 2023 earnings briefing.
Separately, hospitality company Accor (OTCPK:ACRFF) (OTCPK:ACCYY) noted in its January 31, 2024 article posted on its website that “as remote and hybrid work models come into their own, more and more professional travelers” are “looking to stay at their destination for longer.” In this end-January write-up, Accor also cited research firm Future Market Insights’ forecasts that the worldwide extended stay hospitality market segment can expand at a reasonably strong CAGR at the teens percentage level for the 2023-2033 time period. This provides support for CHH’s growth target relating to its extended stay segment.
I am of the opinion that Choice Hotels is likely to allocate more capital to organic growth opportunities such as expanding the reach of its midscale extended stay brand, Everhome Suites, in a larger number of markets going forward. With the Wyndham Hotels deal out of the way, CHH can devote more time and effort to realizing its full organic growth potential.
Final Thoughts
CHH’s current consensus next twelve months’ normalized EV/EBITDA multiple of 13.8 times is 14% lower than its historical mean EV/EBITDA ratio of 16.0 time (source: S&P Capital IQ) for the past decade. I think that Choice Hotels can trade at a higher EV/EBITDA metric closer to or even exceeding its historical average in time to come, when the market pays more attention to its favorable developments.
