Choice Hotels Earnings: 2023 Adjusted EBITDA Guidance Maintained, While 2024 Targets Ahead of Expectations

In a second-quarter earnings profit warning on July 11, Choice Hotels CHH reaffirmed its 2023 adjusted EBITDA target of $525 million-$540 million, offering yet another data point that travel demand remains resilient, driven by the human-ingrained desire for trips and remote work flexibility, in our view. But shares moved 3%-4% higher due to the hotelier guiding 2024 adjusted EBITDA growth for more than 10%. This 2024 target implies over $586 million in adjusted EBITDA (using the midpoint of 2023 guidance), well above the FactSet consensus estimate of $548 million and near our Wall Street high $579 million forecast, which we will review after the company reports second-quarter results in a few weeks. While details behind drivers of the 2024 prognosis were sparse, the company did note year-to-date hotel opening growth of 39%, through June 30, indicate that the hotelier’s brand intangible asset, the source of its narrow moat, is intact. We see its net room growth averaging 2%-3% over the next decade, above the 1.8% supply lift we estimate for the U.S. industry during that time. Also, Radisson synergies—the acquisition of which closed August of 2022—are tracking ahead of 2023′s more than $60 million target, with $20 million additional synergies still to be had. We continue to view this acquisition as strategically sound, as it has increased the hotelier’s mix of higher revenue producing upscale and midscale units, expanded its loyalty membership base by more than 10 million to over 60 million, and enhanced procurement and distribution scale advantages. Further, the price of about $10,000 per key struck us as attractive. We reiterate our Standard capital allocation rating.

We don’t plan to change our $130 fair value estimate and we view shares slightly undervalued. For investors looking for hotel operator exposure, we see narrow-moat companies Wyndham and Accor trading at an attractive 15%-20% discount to our $89 and EUR 41.50 per share fair value estimates, respectively.