CHH: Global Expansion Will Drive Extended Stay Demand And Rebuild Confidence

Key Takeaways

• Global expansion and a shift toward premium, revenue-rich franchise models drive structurally higher growth, resilience, and profitability versus historical trends.
  
• Investment in digital platforms and brand optimization boosts direct bookings, loyalty, and operational efficiency, ensuring steady cash flows and shareholder returns.
  
• Ongoing travel softness, heavy exposure to midscale and economy segments, and international franchise challenges could pressure revenues, margins, and future growth amid rising balance sheet risk.

Catalysts

Operates as a hotel franchisor in the United States and internationally.

• Strong international expansion, including new direct franchising in Canada, a master franchising deal in China targeting 10,000 rooms, and increased presence in EMEA and South America, is set to capture rising global travel demand from growing middle-class populations-driving outsized future revenue and EBITDA growth relative to historical expectations.
  
• Ongoing investment in digital platforms, guest mobile/online experiences, and the enhanced Choice Privileges loyalty program directly boost customer acquisition, retention, and direct bookings, supporting higher RevPAR, lower acquisition costs, and expanding net margins over time.
  
• The company's focus on value-oriented, extended stay, and midscale brands positions it to benefit from increased consumer preference for affordable lodging during uncertain macroeconomic periods, translating into resilient occupancy rates and steady cash flows, even when industry-wide revenue growth moderates.
  
• Portfolio optimization via strategic removal of underperforming hotels and increased mix of revenue-intense rooms (with a RevPAR premium and higher royalty rates) is expected to structurally lift underlying royalty fee revenue, effective royalty rates, and future earnings.
  
• Continued adoption of an asset-light, franchise-centric operating model, complemented by efficiency improvements through technology, increases free cash flow generation, supports consistent shareholder returns, and sustains high return on invested capital (ROIC).

Choice Hotels International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Choice Hotels International's revenue will grow by 30.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 38.4% today to 19.9% in 3 years time.
• Analysts expect earnings to reach $354.2 million (and earnings per share of $8.04) by about September 2028, up from $306.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.7x on those 2028 earnings, up from 17.1x today. This future PE is lower than the current PE for the US Hospitality industry at 23.9x.
• Analysts expect the number of shares outstanding to decline by 1.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.48%, as per the Simply Wall St company report.

Choice Hotels International Future Earnings Per Share Growth

Risks

• Ongoing softness in government and international inbound travel has lowered recent RevPAR results and guidance, and persistence of these trends could pressure future revenues and earnings, especially as these segments are slow to recover compared to domestic leisure travel.
  
• The decline in domestic RevPAR in Q2 2025, a downward revision in RevPAR growth outlook (-3% to flat) for the rest of the year, and macroeconomic uncertainty (reflecting softer leisure transient demand and reduced government/international travel) signal ongoing revenue headwinds that may linger beyond the current year, challenging net margins and earnings growth.
  
• Heavy reliance on midscale, extended stay, and economy brands, along with deliberate exit of underperforming hotels (especially in the Radisson brand), could expose Choice Hotels to greater vulnerability during economic downturns or periods of consumer belt-tightening, leading to excess churn, slower net unit growth, and potentially declining revenue if replacement lags or upgrades are not executed profitably.
  
• Master franchising agreements in key international growth markets (notably China and South America) typically carry lower royalty rates and more limited oversight, risking dilution of overall group royalty rate and margin expansion; slower-than-expected ramp-up or execution in these master franchise markets could dampen anticipated international earnings growth.
  
• The presence of $80M in property loans, and recent reports of loan defaults to underperforming franchisees, highlight capital risk and potential future credit losses; this could increase balance sheet risk, raise costs, or result in write-downs that negatively impact net income and free cash flow conversion.

Valuation

• The analysts have a consensus price target of $132.929 for Choice Hotels International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $160.0, and the most bearish reporting a price target of just $117.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.8 billion, earnings will come to $354.2 million, and it would be trading on a PE ratio of 21.7x, assuming you use a discount rate of 9.5%.
• Given the current share price of $113.97, the analyst price target of $132.93 is 14.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.