There are a lot of reasons for investors to be fearful of at the moment. War continues to rage between Ukraine and Russia. The Fed is laser-focused on bringing down inflation. This hawkishness and increasing concerns of a slowdown in economic growth have resulted in stocks plunging lower.
Despite the increasing bearish sentiment, investors should remember that some of the best investment opportunities are birthed during these episodes of fear when markets are cascading lower. And, these opportunities are often found in finding companies, with improving fundamentals, that are exposed to bullish secular trends that are disconnected from economic or geopolitical factors.
Today, I want to talk about such a company – Choice Hotels (CHH). CHH is benefiting from a massive boom in travel which should continue over the next couple of years. Further, the company has a favorable business model for investors and should continue seeing margins and earnings trend higher. Revenues have also returned to pre-pandemic levels even with many categories of travel far from pre-pandemic levels.
Read on to find out why CHH is my growth stock of the week.
While Choice Hotels may not be familiar to most people, its many brands certainly are. Some off the most well-known include Comfort Inn, Comfort Suites, Quality, Clarion, Clarion Pointe, Sleep Inn, Econo Lodge, Rodeway Inn, and MainStay Suites. As of the start of the year, the company had nearly 600,000 rooms in all 50 states and 40 countries.
It operates in two segments: Hotel Franchising; and Corporate & Other. It franchises all of its properties, and it also has a unit dedicated to selling its cloud-based, software for property management to other hoteliers.
CHH gives investors operating leverage due to its business model. As a franchisor, it has higher profit margins than its peers. For instance, it had 26.9% profit margins last quarter, while competitors like Marriot (MAR) and Hilton (HLT) had profit margins of 7.9% and 7.1%, respectively.
Another source of operating leverage is its growing, software business which is growing at a double-digit rate with increasing adoption and use. These types of SaaS products can become integral to operators which creates future opportunities to raise prices and provide more features for additional monetization.
For these reasons, CHH is pretty unique among hotel stocks.
This operating leverage means that CHH will see significant earnings growth as the travel market booms this summer and into 2023. Already, there are reports of record demand among airlines and cruises as the coronavirus continues to recede as a major issue.
TSA travel data shows that travel volumes are about 10% below pre-pandemic levels despite impairment in business and international travel and airlines operating at a lower capacity. Given such developments, it’s likely that we are in the early innings of an unprecedented boom in travel with pent-up demand that should persist for many quarters.
Another catalyst for CHH is that its margins are likely to expand due to growth in its software business. Further, the company is less affected by inflation due to its franchising model. Higher margins are supportive of multiple expansion, while the recovery in travel is supportive of revenue growth.
CHH is a company with multiple positive tailwinds in place. Recent market volatility is creating an opportunity to buy shares at an attractive valuation.
In addition, the POWR Ratings are also very positive on the stock as it’s rated a B which translates to a Buy. B-rated stocks have posted an average annual return of 21.1% which compares favorably to the S&P 500’s average annual return of 8%.
It also has strong component grades including an A for Quality due to its success in increasing margins and investor-friendly business model. It has a B for Growth which is consistent with its organic growth and the cyclical boost as pent-up demand for travel is unleashed in the coming years. Click here to see more of CHH’s POWR Ratings including component grades for Value and Momentum.
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