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On Thursday, Baird, a financial services firm, adjusted its outlook for Choice Hotels (NYSE:CHH) International, Inc. (NYSE:CHH) shares, raising the price target on the stock to $138 from the previous $134 while maintaining an Outperform rating.
The firm anticipates an uptick in Revenue Per Available Room (RevPAR) growth and net unit growth for Choice Hotels in the upcoming quarters. This projection is seen as a positive influence on the stock price and valuation multiple, despite a general negative investor sentiment, highlighted by the fact that 23% of the company's float is currently short.
The Baird analyst acknowledged the challenges facing Choice Hotels, including sluggish net unit growth and substantial investment spending when compared to other global hotel brands. These factors are believed to be well-understood by the market at this point. However, concerns remain that these issues could adversely affect the company's financial performance in 2025, particularly when compared to peers with more robust growth prospects.
The report also suggested that potential interest rate cuts could act as a tailwind for both consumers and hotel developers, which may benefit Choice Hotels. Small- and mid-cap stocks have been regaining favor among investors, which could support the performance of Choice Hotels shares in the near term.
Despite a six-quarter decline in lower-end chain scale RevPAR, including the third quarter of 2024, a solid employment outlook and stable economic conditions could foster increased spending and demand for Choice Hotels' predominantly domestic portfolio.
The analyst also noted that moving forward, there will be a keen focus on the 2025 outlook and the various factors that could affect earnings. The previous years have seen benefits from synergies with Radisson, stock buybacks, additional credit card fees, and real estate ownership, which may not be as influential in the future. As the stock price nears $140, the analyst sees a less attractive risk-reward balance for Choice Hotels shares.
In other recent news, Choice Hotels International posted strong financial results for the second quarter, including a 14% increase in revenue to $258.9 million and a 6% growth in adjusted EBITDA to a record $161.7 million. These recent developments have been bolstered by the company's success in conversions and new construction projects, especially in the extended-stay and mid-scale brands.
Choice Hotels has also seen an 8% year-on-year growth in domestic franchise agreements, and its global pipeline has reached a record 115,000 rooms, marking a 22% increase from the previous year.
However, Goldman Sachs initiated coverage on Choice Hotels with a Sell rating and a price target of $105.00. The firm cited potential difficulties in achieving its EBITDA and earnings per share (EPS) estimates for the coming years.
Goldman Sachs also stands 5% and 7% below the consensus EPS estimates for 2025 and 2026, respectively. The firm's caution extends to Choice Hotels' net unit growth (NUG) targets, especially the 2024 guidance for domestic NUG of around 2%, which the analyst believes will be difficult to achieve.
Despite these projections, Choice Hotels remains committed to franchise fee growth and unit growth, supported by a strong cash position for future investments and shareholder returns.
InvestingPro Insights
Recent data from InvestingPro adds depth to Baird's analysis of Choice Hotels International, Inc. (NYSE:CHH). The company's market capitalization stands at $6.34 billion, with a P/E ratio of 22.4 based on the last twelve months as of Q2 2024. This valuation aligns with Baird's cautious optimism, as it suggests investors are willing to pay a premium for CHH's earnings potential.
Choice Hotels' financial health appears robust, with a gross profit margin of 90.13% for the last twelve months as of Q2 2024, supporting the InvestingPro Tip that highlights the company's "impressive gross profit margins." This strong profitability could provide a buffer against the challenges mentioned in the Baird report, such as sluggish net unit growth and high investment spending.
Another InvestingPro Tip notes that Choice Hotels "has maintained dividend payments for 21 consecutive years," which may appeal to income-focused investors and suggests financial stability even during economic fluctuations. This consistent dividend history could be particularly attractive in light of potential interest rate cuts mentioned in the article.
For investors considering Choice Hotels, InvestingPro offers 7 additional tips that could provide further insights into the company's financial position and market performance. These additional tips, available with an InvestingPro subscription, could be valuable for assessing the stock's potential in light of Baird's updated outlook and price target.
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