Choice Earnings: Sales Growth Moderates After a Strong Recovery; Radisson Synergies Drive Profits

We don’t expect much change to our Choice CHH $130 fair value estimate, outside of time value, as demand growth moderates after a strong recovery to date. Having already recovered to 2019′s level in 2021, Choice’s U.S. second-quarter revenue per available room (including its Radisson acquisition), or revPAR, moderated to just 0.5% growth, compared with a 6% lift last quarter. We estimate revPAR was down a point or two from last quarter’s 119% of 2019′s level. Still, Choice maintained its 2023 revPAR growth target of 2%, which we think is achievable. This growth sits below the low-double-digit lift we expect for narrow-moat peers Hilton and Marriott, which have more exposure to travel broadening out to group, business, and international from leisure travel, which led the recovery. Beyond this year, we see a mid-single-digit revPAR average annual increase in 2024-27 for Choice, as the firm benefits from remote work flexibility and a U.S. onshoring and infrastructure rebuild, boosting its interstate and extended-stay portfolio.

Quarterly adjusted EBITDA margins were 35.8% versus 35.2% last year, helped by $80 million in annualized Radisson integration synergies achieved ahead of 2024 expectations. As such, Choice lifted the low end of its 2023 EBITDA guidance range by $5 million, to $530-$540 million, which is around 145% of 2019′s level at the midpoint. We don’t expect to materially adjust our preprint $536 EBITDA million forecast. Further, the hotelier expects 2024 EBITDA up 10% (announced in a profit warning in July), implying $588 million, near our Wall Street-high $579 million forecast, aided by an incremental $20 million in Radisson synergies.

We view development metrics as respectable and supportive of Choice’s narrow-moat brand intangible asset. Unit growth was up 8.8% in the quarter, aided by the Radisson acquisition. The hoteliers pipeline expanded 10% (9% in the U.S. and 29% internationally) from last year to 93,000 rooms, representing 15% of its existing base.