Choice Hotels: Significant Growth Potential, But Remains Overvalued

benedek/E+ via Getty Images

Over nan past 2 years, Choice Hotels International, Inc. (NYSE:CHH) has knowledgeable an upward trend. The institution has demonstrated important maturation successful its nett income, and un-levered rate flows to nan patient (UFCF) are besides connected nan rise. CHH acquired Radisson Americas, launched a caller marque (Everhome Suites), and had a 5% summation successful its royalty rate. However, it's important to statement that nan existent P/E ratio is higher than that of its peers, and nan existent marketplace value is trading supra its intrinsic value. So, while location are immoderate affirmative trends astatine CHH, I'm limiting my existent enthusiasm for nan banal to a Hold.

About nan company

Choice Hotels International, Inc. is simply a franchisor successful nan hospitality manufacture that was established successful 1939 and has grown to go 1 of nan largest franchisors of hotels worldwide. The company is divided into 2 main segments, which are Hotel Franchising and Corporate & Other. Choice Hotels offers a scope of edifice brands, specified arsenic Comfort Inn, Comfort Suites, Quality Inn, Sleep Inn, Clarion, Cambria Hotels, MainStay Suites, Suburban Extended Stay, Econo Lodge, and Rodeway Inn. Each of these brands is tailored to meet nan needs of different segments of nan market, ranging from budget-conscious travelers to those seeking luxury accommodations. Apart from franchising hotels, Choice Hotels besides manages its ain loyalty program, known arsenic Choice Privileges.

Recent performance

Over nan past 2 years, CHH has exhibited singular performance, achieving a important surge successful gross of astir 37% successful 2021 and 29% successful nan anterior year. The institution besides successfully acquired Radisson Americas, which generated an further adjusted EBITDA of $18 million. Moreover, CHH observed a maturation of astir 30% year-over-year successful its home upscale units, and its franchise agreements accrued by 11% successful nan past year. CHH besides outperformed nan industry successful (RevPAR) maturation for nan 3rd consecutive year.

Strengths

The company's extended world scope is 1 of its astir notable advantages. Its beingness successful 47 countries worldwide reduces reliance connected nan capacity of a circumstantial economy. With a important number of astir 7,500 hotels operating crossed 5 chopped segments and nether 22 different brands, CHH has a highly diversified portfolio.

The caller acquisition of Radisson Americas is different facet that contributes to nan company's strength. Radisson America is simply a salient edifice concatenation successful nan upscale conception of nan industry. Following nan acquisition, CHH was capable to recognize an further adjusted EBITDA of $18 cardinal successful nether six months. This suggests nan maturation imaginable that Radisson Americas has brought to CHH, which whitethorn consequence successful accrued income for investors successful nan future.

CHH is not solely expanding done nan acquisition of established edifice chains, but besides done soul growth. As of nan extremity of 2022, nan institution had much than 1,000 hotels successful nan pipeline globally. The completion of these projects could consequence successful important gross for nan institution and heighten its capacity successful nan years to come.

A person introspection of CHH's income connection to gauge nan company's financial spot reveals its robust capacity aft nan pandemic. The company's bottommost statement accrued by 283% pursuing nan lifting of COVID restrictions successful 2021, and by 15% arsenic things began to return to normal successful 2022. Furthermore, nan company's operating expenses grew astatine a slower gait comparative to nan revenue, resulting successful accrued income disposable for indebtedness repayment and equity holders.

Weaknesses

One of nan biggest weaknesses of nan institution is its precocious debt. The existent debt to equity (D/E) is 8.24x which intends that for each $1 of nan institution owned by shareholders, nan business owes $8.2 to creditors. This indicates that nan institution is relying much heavy connected borrowing than its ain equity. A precocious debt-to-equity ratio for CHH whitethorn bespeak a important magnitude of financial consequence arsenic nan institution would first request to salary high-interest payments which tin impact nan profitability of nan investors.

Another weakness indicated by CHH's equilibrium expanse is its short-term liquidity risk. The company's existent ratio is 0.8, which poses a threat to its day-to-day operations and whitethorn propose a business wherever nan institution could look trouble successful gathering its short-term obligations.

Looking forward

The study of CHH's intrinsic valuation, utilizing some EV/EBITDA and P/E multiples, yielded an mean worth of $110.30. As a result, nan existent banal value of $122.85 appears to beryllium 11% supra nan estimated intrinsic value, indicating that nan banal is somewhat overvalued astatine this time. These valuations were based connected nan pursuing assumptions:

Peers - For comparison and valuation techniques, CHH's peers were selected based connected nan similarity of their business and marketplace capitalization. The 5 companies considered for this intent are Wyndham Hotel & Resorts, Inc. (WH), Marriott Vacations Worldwide Corp. (VAC), Hilton Grand Vacations Inc. (HGV), Travel + Leisure Co. (TNL), and InterContinental Hotels Group PLC (IHG).

In position of EV/EBITDA, a adjacent mean aggregate of 12.81x was utilized to comparison pinch CHH's 14.61x.

As for nan P/E multiple, a adjacent mean aggregate of 19.02x was employed to comparison pinch CHH's 20.63x.

Created by writer utilizing information from Seeking Alpha

Conclusion

Based connected caller developments specified arsenic CHH's acquisition of Radisson Americas and complete 1,000 caller hotels successful nan pipeline, it appears that nan institution has a important imaginable for added gross and nett income growth, indicating a agleam future. This is why I would for illustration to support CHH successful my watchlist.

However, it's important to statement that nan institution is highly leveraged, and its short-term liquidity could airs a consequence to its day-to-day operations. Additionally, nan appraisal of intrinsic worth calculation suggests that nan institution is somewhat overvalued astatine present. All things considered; I would complaint CHH arsenic Hold.

I person joined Sungarden Investment Publishing arsenic an Investment Research Intern successful nan Spring of 2023. I completed my undergraduate successful 2016 and was an entrepreneur for complete 4 years . Afterwards, I started  Master’s successful Finance grade pinch Stevens Institute of Technology successful Fall 2021 and person a cumulative GPA of 3.97. I now aspires to go a starring Financial Analyst. Closely associated pinch writer Modern Income Investor.