Choice Hotels International, Inc.'s (NYSE:CHH) Earnings Haven't Escaped The Attention Of Investors

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Choice Hotels International, Inc. (NYSE:CHH) as a stock to potentially avoid with its 27x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Choice Hotels International could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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Is There Enough Growth For Choice Hotels International?

The only time you'd be truly comfortable seeing a P/E as high as Choice Hotels International's is when the company's growth is on track to outshine the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 6.1%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 29% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Turning to the outlook, the next three years should generate growth of 13% per year as estimated by the twelve analysts watching the company. That's shaping up to be materially higher than the 11% per year growth forecast for the broader market.

With this information, we can see why Choice Hotels International is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Choice Hotels International maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 1 warning sign for Choice Hotels International that we have uncovered.

If these risks are making you reconsider your opinion on Choice Hotels International, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.