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Extended Stay America Up 20% in 6 Months: More Room to Run?

Zacks Equity Research
Updated
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Asbury Automotive (ABG) shares have started gaining and might continue moving higher in the near term, as indicated by solid earnings estimate revisions.

Extended Stay America, Inc. STAY is gaining momentum backed by impressive earnings surprise history, cost control measures and other strategic initiatives. In the past six months, shares of the company have gained 20.1% against the industry’s decline of 1.6%. However, these signs of optimism are clouded by intense competition and the company’s lack of exposure in international markets. Let’s delve deeper.

The Bullish Case

Extended Stay America’s outperformance can be primarily attributed to its solid earnings surprise history. The company’s earnings have surpassed the Zacks Consensus Estimate in the preceding eight out of 10 quarters. In first-quarter 2018, the company’s bottom line came in at 31 cents, surpassing the consensus mark of 28 cents. Also, consensus estimates for 2018 have witnessed upward revisions over the past 30 days, indicating analysts’ optimism surrounding the stock.

Furthermore, in a bid to drive growth in the long run, Extended Stay America seems to be banking on strategic efforts. The company is refocusing on core customers in spite of focusing on fleeting customers. Additionally, its initiatives toward controlling costs and decreasing capital requirement for fresh hotel builds are commendable. Extended Stay America is confident about increasing unit growth as well. By 2021, the company’s portfolio will have 700 Extended Stay America branded properties, out of which nearly 70% will be owned or operated and 30% franchised. In February, it closed a deal to sell 25 hotels, an affiliate of Three Wall Capital, for $114 million. Yet, Extended Stay America will continue to manage all these 25 hotels over a 20-year contract.

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The Zacks Rank #3 (Hold) company’s efforts to drive its revenue per available room (ReVPAR) by providing suitable services to value-conscious business travellers are also encouraging. In 2017, its ReVPAR increased 1.7% from the prior-year quarter on 1.1% growth in Average Daily Rate (ADR) and 40 basis points (bps) expansion in occupancy. The uptrend continued in first-quarter 2018, with RevPAR witnessing a comparable system-wide growth of 3.7%. For second-quarter and 2018, Extended Stay America anticipates comparable system-wide RevPAR growth in the range of 1-3% each.

The Bearish Case

Extended Stay America’s lack of exposure in international markets might limit its revenue growth potential. In addition, low corporate demand is likely to continue hurting the company’s performance.

Moreover, the hospitality industry is cyclical in nature and a worsening of global economic conditions might in turn dent Extended Stay America’s revenues and profits. Also, consumer demand for services is closely linked to the performance of the general economy and is sensitive to business as well as personal discretionary spending levels. Decline in consumer demand due to adverse general economic conditions, poor travel patterns, lower consumer confidence and high unemployment might lower revenues and profitability of Extended Stay America.

Key Picks

Some better-ranked stocks in the same space are Wingstop Inc. WING, BJ's Restaurants Inc. BJRI and Dine Brands Global, Inc. DIN. All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Wingstop has an impressive long-term earnings growth rate of 19.5%.

BJ's Restaurants has an impressive long-term earnings growth rate of 15.3%.

Dine Brands Global has reported better-than-expected earnings in the trailing four quarters, with an average beat of 7.8%.

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