Hotel franchisor Choice Hotels (NYSE:CHH) met Wall Street’s revenue expectations in Q3 CY2024, but sales were flat year on year at $428 million. Its non-GAAP profit of $2.23 per share was 16.6% above analysts’ consensus estimates.
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Choice Hotels (CHH) Q3 CY2024 Highlights:
- Revenue: $428 million vs analyst estimates of $431.9 million (in line)
- Adjusted EPS: $2.23 vs analyst estimates of $1.91 (16.6% beat)
- EBITDA: $177.6 million vs analyst estimates of $167.4 million (6.1% beat)
- Management raised its full-year Adjusted EPS guidance to $6.79 at the midpoint, a 4% increase
- EBITDA guidance for the full year is $595 million at the midpoint, above analyst estimates of $581.3 million
- Gross Margin (GAAP): 94.8%, in line with the same quarter last year
- Operating Margin: 35.5%, up from 31.7% in the same quarter last year
- EBITDA Margin: 41.5%, up from 36.6% in the same quarter last year
- Free Cash Flow Margin: 38.1%, up from 20.1% in the same quarter last year
- RevPAR: $62.41 at quarter end, up 9.4% year on year
- Market Capitalization: $6.52 billion
"Choice Hotels generated another quarter of record financial performance, demonstrating the successful execution of our growth strategy and giving us the confidence to raise our full-year guidance," said Patrick Pacious, President and Chief Executive Officer.
Company Overview
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.
Travel and Vacation Providers
Airlines, hotels, resorts, and cruise line companies often sell experiences rather than tangible products, and in the last decade-plus, consumers have slowly shifted from buying "things" (wasteful) to buying "experiences" (memorable). In addition, the internet has introduced new ways of approaching leisure and lodging such as booking homes and longer-term accommodations. Traditional airlines, hotel, resorts, and cruise line companies must innovate to stay relevant in a market rife with innovation.
Sales Growth
A company’s long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for multiple years. Regrettably, Choice Hotels’s sales grew at a sluggish 7.3% compounded annual growth rate over the last five years. This shows it failed to expand in any major way, a rough starting point for our analysis.
We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new property or emerging trend. Choice Hotels’s annualized revenue growth of 8.3% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak. 
Choice Hotels also reports revenue per available room, which clocked in at $62.41 this quarter and is a key metric accounting for daily rates and occupancy levels. Over the last two years, Choice Hotels’s revenue per room averaged 5.3% year-on-year growth. Because this number is lower than its revenue growth, we can see its sales from other areas like restaurants, bars, and amenities outperformed its room bookings. 
This quarter, Choice Hotels’s $428 million of revenue was flat year on year and in line with Wall Street’s estimates.
Looking ahead, sell-side analysts expect revenue to grow 2.1% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and illustrates the market believes its products and services will face some demand challenges.
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Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.
Choice Hotels has shown impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 14.9% over the last two years, better than the broader consumer discretionary sector.
Choice Hotels’s free cash flow clocked in at $162.9 million in Q3, equivalent to a 38.1% margin. This result was good as its margin was 17.9 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends trump fluctuations.
Key Takeaways from Choice Hotels’s Q3 Results
We enjoyed seeing Choice Hotels exceed analysts’ EPS expectations this quarter. We were also glad its EBITDA outperformed Wall Street’s estimates. On the other hand, its revenue missed. Looking ahead, EBITDA guidance was ahead and full year EPS guidance was raised, which is a positive. Overall, this quarter was mixed but featured some important positives. The stock remained flat at $138.76 immediately after reporting.
Sure, Choice Hotels had a solid quarter, but if we look at the bigger picture, is this stock a buy? When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free.
