Choice Hotels: Q1 Earnings Beat Reinforces My Bullish View

Elevator Pitch

My Buy investment rating for Choice Hotels International, Inc.'s (NYSE:CHH) stock remains unchanged. In my prior November 10, 2022 update for Choice Hotels, I evaluated Choice Hotels' financial performance for the third quarter of last year.

My current write-up focuses on the review of CHH's recently released Q1 2023 financial results. Choice Hotels' most recent quarterly results were above expectations and the company also raised its fiscal 2023 EBITDA guidance. In the long run, CHH's growth outlook remains positive considering trends like flexi-work and onshoring. Therefore, I continue to have a bullish view of Choice Hotels, and my Buy rating for CHH stock stays intact.

CHH's First Quarter Financial Results Came In Above Expectations

Earlier on May 9, 2023 before the market opened, Choice Hotels announced its results for the first quarter of the current year which turned out to be much better what the market had anticipated.

CHH's top line rose by +29.1% YoY from $257.7 million in Q1 2022 to $332.8 million for Q1 2023. Choice Hotels had achieved a faster pace of revenue growth in the first quarter of this year as compared to prior quarters; CHH's sales expansion rates were relatively slower at +28.1% YoY and +27.2% YoY for Q3 2022 and Q4 2022, respectively. The company's Q1 2023 revenue also surpassed the analysts' consensus top line estimate of $320.4 million by +3.9%.

The actual Q1 2023 non-GAAP adjusted EBITDA for Choice Hotels amounting to $106.4 million was +3.8% and +1.9% better than the company's prior guidance of $102.5 million and the sell-side's earlier consensus forecast of $104.4 million (source: S&P Capital IQ), respectively. CHH's normalized EBITDA margin also improved by +90 basis points QoQ from 31.1% for Q4 2022 to 32.0% in Q1 2023.

Choice Hotels' normalized earnings per share or EPS of $1.12 for Q1 2023 was the company's best ever first quarter bottom line performance, and this was +10.8% above the market's consensus earnings projection of $1.01 per share. CHH had achieved a reasonably decent +8.7% YoY EPS growth in the most recent quarter.

At the company's Q1 2023 earnings briefing, Choice Hotels attributed its above expectations first quarter financial performance to the "significant uptick in travel demand" as "consumers prioritize travel" which is reflected in CHH's RevPAR (Revenue Per Available Room) numbers. Choice Hotels' Q1 2023 RevPAR was +15.1% above what the company achieved in Q1 2019 prior to the pandemic as indicated in its recent quarterly earnings presentation.

Choice Hotels Lifted The Company's 2023 EBITDA Guidance

CHH's above expectations Q1 2023 performance has prompted the company to revise its full-year operating profit guidance upwards. Specifically, the mid-point of Choice Hotels' FY 2023 EBITDA guidance was increased from $530 million previously to $532.5 million now. In other words, the company expects its current year EBITDA to be +11.3% and +45.9% higher than what it delivered in FY 2022 and FY 2019, respectively.

The favorable financial outlook for Choice Hotels in FY 2023 is supported by two key factors.

One key factor is portfolio mix. I specifically highlighted the "growth potential of CHH's upscale and extended stay segments" with my earlier November 10, 2022 article. At its Q1 results call, Choice Hotels mentioned about its efforts to drive "room growth in more revenue-intense segments" such as extended stay and upscale that should lead to "an outsized increase in royalties" going forward. In a nutshell, CHH has been optimizing its portfolio mix with the aim of having a growing share of hotels in the segments which generate higher revenue and royalties, and this should be supportive of sustained EBITDA growth this year.

The other key factor is M&A integration. CHH previously concluded the takeover of Radisson Hotels Americas in August last year. Choice Hotels disclosed at the company's most recent first quarter earnings call that it is "ahead of plan integrating the Radisson Hotels Americas business unit." This means that CHH is likely to be able to meet Radisson Hotels Americas' FY 2023 EBITDA contribution target of $60 million.

Long-Term Growth Outlook For CHH Is Supported By Favorable Trends

There are favorable trends that have a positive impact on Choice Hotels' growth prospects in the long run.

A trend worth watching is onshoring. CHH cited market research indicating that between "50 million and 100 million room nights" of hotel demand could be potentially created by the "reshoring of American manufacturing" at its Q1 2023 results briefing. Choice Hotels' plans to expand further in the extended stay segment (as noted in the previous section) should pay off, as onshoring is expected to drive greater demand for business travel.

Another trend that warrants more attention is flexi-work. As an increasing number of companies adopt flexible work arrangement, people should able to allocate more time to traveling, which should boost leisure travel demand. CHH's recent quarterly metrics are consistent with the view that flexi-work is a driver of leisure travel growth. As per its management commentary at the Q1 2023 earnings briefing, Choice Hotels observed that its occupancy rate on Thursdays and Sundays expanded by close to 200 basis points in the recent quarter as compared to pre-pandemic levels.

Closing Thoughts

I have a favorable opinion of Choice Hotels' business outlook for both the short term and long term, and I view CHH as a good play on travel demand growth. Choice Hotels' valuations are still appealing, as its consensus forward normalized P/E multiple of 20.3 times (source: S&P Capital IQ) is significantly below its 10-year mean P/E ratio of 24.2 times. The factors mentioned above explain my Buy rating for CHH.

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