Choice Hotels currently trades at $131.55 per share and has shown little upside over the past six months, posting a small loss of 0.6%.
Is now the time to buy Choice Hotels, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
We're swiping left on Choice Hotels for now. Here are three reasons why CHH doesn't excite us and a stock we'd rather own.
Why Is Choice Hotels Not Exciting?
With almost 100% of its properties under franchise agreements, Choice Hotels (NYSE: CHH) is a hotel franchisor known for its diverse brand portfolio including Comfort Inn, Quality Inn, and Clarion.
1. Weak RevPAR Growth Points to Soft Demand
We can better understand Travel and Vacation Providers companies by analyzing their RevPAR, or revenue per available room. This metric accounts for daily rates and occupancy levels, painting a holistic picture of Choice Hotels’s demand characteristics.
Choice Hotels’s RevPAR came in at $46.79 in the latest quarter, and over the last two years, its year-on-year growth averaged 1.1%. This performance was underwhelming and suggests it might have to invest in new amenities such as restaurants and bars to attract customers - this isn’t ideal because expansions can complicate operations and be quite expensive (i.e., renovations and increased overhead). 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Choice Hotels’s revenue to rise by 4.3%, a slight deceleration versus its 6.3% annualized growth for the past two years. This projection doesn't excite us and suggests its products and services will face some demand challenges.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Choice Hotels’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Choice Hotels isn’t a terrible business, but it doesn’t pass our quality test. That said, the stock currently trades at 18.6× forward price-to-earnings (or $131.55 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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