Choice Hotels International, Inc. :CHH-US: Earnings Analysis: Q3, 2016 By the Numbers : November 8, 2016

Choice Hotels International, Inc. reports financial results for the quarter ended September 30, 2016.

We analyze the earnings along side the following peers of Choice Hotels International, Inc. – Wyndham Worldwide Corporation, La Quinta Holdings, Inc. and Hilton Worldwide Holdings, Inc. (WYN-US, LQ-US and HLT-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 267.58 million, Net Earnings of USD 47.57 million.
  • Gross margins narrowed from 43.04% to 42.07% compared to the same period last year, operating (EBITDA) margins now 30.35% from 31.84%.
  • Year-on-year change in operating cash flow of -0.35% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth due to contribution of one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2015-09-30 2015-12-31 2016-03-31 2016-06-30 2016-09-30
Relevant Numbers (Quarterly)
Revenues (mil) 241.53 210.95 207.12 241.75 267.58
Revenue Growth (%YOY) 12.25 13.78 18.19 4.13 10.79
Earnings (mil) 41.14 29.01 19.47 38.55 47.57
Earnings Growth (%YOY) 5.29 15.57 -9.16 8.38 15.61
Net Margin (%) 17.03 13.75 9.4 15.95 17.78
EPS 0.72 0.51 0.35 0.68 0.84
Return on Equity (%) N/A N/A N/A N/A N/A
Return on Assets (%) 23.25 16.23 10.35 18.91 22.52

Access our Ratings and Scores for Choice Hotels International, Inc.


Market Share Versus Profits

Revenues History
Earnings History

CHH-US‘s change in revenue this period compared to the same period last year of 10.79% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that CHH-US is holding onto its market share. Also, for comparison purposes, revenues changed by 10.68% and earnings by 23.39% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus


Earnings Growth Analysis

The company’s earnings rose year-on-year. But this growth has not come as a result of improvement in gross margins or any cost control activities in its operations. Gross margins went from 42.07% to 43.04% for the same period last year, while operating margins (EBITDA margins) went from 30.35% to 31.84% over the same time frame.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost


Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

CHH-US‘s decline in gross margins were offset by some improvements on the balance sheet. The management of working capital, for example, shows progress. The company’s working capital days have fallen to 39.48 days from 68.63 days for the same period last year. This leads Capital Cube to conclude that the gross margin decline is not altogether bad.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich


Cash Versus Earnings – Sustainable Performance?

CHH-US‘s change in operating cash flow of -0.35% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings


Margins

The company’s operating (EBIT) margins contracted from 30.56% to 29.23%. In spite of this, the company’s earnings rose. This was influenced primarily by one-time items, which improved pretax margins from 25.78% to 26.24%.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

Access our Ratings and Scores for Choice Hotels International, Inc.


Company Profile

Choice Hotels International, Inc. franchises hotels. The company offers full service hotels in the economy, mid-scale and upscale segments. It franchises lodging properties under the brand names: Comfort Inn, Comfort Suites, Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites, Suburban Extended Stay Hotel, Cambria Suites and Ascend Collection. The company operates through two segments: Franchising & SkyTouch Technology. The Franchising segment includes the company’s hotel franchising operations consisting of its eleven brands. The SkyTouch Technology is a division of the company that develops and markets cloud-based technology products to hoteliers not under franchise agreements with the Company. Choice Hotels International was founded in 1996 and is headquartered in Silver Spring, MD.

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