Why Is Extended Stay America (STAY) Down 1.3% Since Last Earnings Report?

A month has gone by since the last earnings report for Extended Stay America (STAY). Shares have lost about 1.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Extended Stay America due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Extended Stay Q3 Earnings Top, RevPAR Growth Continues

Extended Stay America reported better-than-expected earnings for the fourth straight quarter in third-quarter 2018.

Adjusted earnings came in at 39 cents per share, outpacing the Zacks Consensus Estimate of 38 cents. The bottom line grew 11.4% year over year on a drop in effective tax rate as well as lower depreciation and general and administrative expenses. Share repurchase also boosted earnings.

Detailed Revenue Discussion

Total revenues of $351.1 million in the third quarter were marginally ahead of the consensus mark of $346.8 million. The top line inched up 0.1% on a year-over-year basis driven by increase in RevPAR and franchise and management fee revenues, mainly offset by hotel dispositions. On a comparable company-owned basis, total revenues rose 2.3% in third-quarter 2018.

In the quarter under review, comparable system-wide RevPAR increased 1.9% on a year-over-year basis. The uptick was the result of a 0.5% improvement in average daily rate (ADR) and a 110-basis point (bps) rise in occupancy to 80.1%. Also, total company-owned RevPAR improved 2.7% and comparable company-owned RevPAR rose 2% to $57.15 in the quarter under review.

Behind the Headlines

Hotel operating margin in the quarter was 55.5%, reflecting a 170-bp decline from the prior-year quarter. The drop was due to an increase in payroll, reservation, marketing and maintenance expenses. Net income totaled $75.7 million compared with $66.3 million in the same period in 2017, marking an increase of 14.3%. The metric in the third quarter was favorably impacted by a lower effective tax rate, reduction in depreciation and general and administrative expenses along with gain from asset dispositions.

Cash and cash equivalents as of Sep 30, 2018, was $370.4 million compared with $113.3 million at the end of Dec 31, 2017. Total shareholders’ equity at the end of the third quarter was $1,318.5 million. As of Sep 30, 2018, total debt (net of unamortized deferred financing costs and debt discounts) amounted to $2,478.9 million, down from $2,541.9 million at the end of Dec 31, 2017.

Extended Stay invested roughly $57.8 million as capital expenditures in the quarter under review. This investment included approximately $22.4 million for new hotel development and conversions. On Oct 31, the company’s board of directors announced cash distributions totaling 22 cents per share, which is payable on Nov 29, 2018, to shareholders of record as of Nov 15, 2018. Extended Stay has bought back 0.6 million shares for $11.7 million during the quarter.

2018 Outlook

The company has updated guidance for 2018 that reflects the sale of 32 hotels in the third quarter of 2018 and expected disposition of 14 hotels in the fourth quarter of 2018. Extended Stay expects total revenues (including franchise and management revenues and asset dispositions) in the range of $1,271-$1,277 million compared with prior guidance of $1,257-1,279 million.

Moreover, comparable system-wide RevPAR is envisioned in the 1.75-2.25% band, up from prior range of 1-2.75%. Adjusted EBITDA is projected between $596 and $603 as compared with the prior guidance of $595 million to $610 million.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

Currently, Extended Stay America has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Extended Stay America has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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