Over the last six months, Choice Hotels shares have sunk to $123.50, producing a disappointing 17.5% loss - worse than the S&P 500’s 1.9% drop. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Choice Hotels, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Choice Hotels Will Underperform?
Even though the stock has become cheaper, we're cautious about Choice Hotels. Here are three reasons why we avoid CHH and a stock we'd rather own.
1. RevPAR Hits a Plateau
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.
Over the last two years, Choice Hotels failed to grow its RevPAR, which came in at $42.96 in the latest quarter. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Choice Hotels 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 Shows Limited Upside
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 stall, a deceleration versus its 3.6% annualized growth for the past two years. This projection is underwhelming and implies its products and services will face some demand challenges.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared 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. Unfortunately, Choice Hotels’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Choice Hotels, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 17.7× forward P/E (or $123.50 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better investment opportunities out there. Let us point you toward an all-weather company that owns household favorite Taco Bell.
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