- The Washington Times - Monday, April 30, 2007

Choice Hotel International Inc., hopes its new upscale hotel brand will boost the franchiser’s stagnant earnings, but some analysts say it won’t be enough.

The Silver Spring hospitality chain franchises more than 5,300 midscale and economy hotels in the United States and abroad under brands including Comfort Inn, Quality Inn and Econo Lodge.

In the past two years, the company has focused on developing new upscale hotels with more space and high-tech amenities to entice wealthy business travelers.

“The reception from developers and consumers has been strong,” said David Peikin, a spokesman for Choice Hotels. “And we are certainly seeing the demand.”

“These are larger properties so we get more revenue flowing through the hotels,” said Mr. Peikin. “More rooms, more revenue, and the higher rates mean even more revenue for Choice.”

As a franchiser, Choice generates income by charging hotel owners a fee for royalties, marketing and reservations.

But analysts are less optimistic.

“I don’t know that we are expecting this to be a game changer,” said David Katz, an analyst at CIBC World Markets Inc., an investment bank in Toronto.

Mr. Katz said the company is distinguishing itself from competitors by entering the upscale market, but they will be working in unfamiliar territory.

“It’s never going to move the needle the way that [its midscale hotels like] Comfort Inn and Comfort suites will,” said Mr. Katz.

Last week Choice announced the opening of a Cambria Suites hotel in Boise, Idaho, the first of 51 currently in development.

Three of the planned Cambria Suites are being built in the Washington area, at the Baltimore Inner Harbor, Baltimore-Washington International Thurgood Marshall Airport and on Kent Island on the Eastern Shore.

“Choice has a stable straightforward business, but I don’t see the stock breaking $45 in the next year” said Robert LaFleur, an analyst at Susquehanna International Group LLP, in Bala Cynwyd, Pa.

Shares of Choice Hotels jumped $2 to $38.22 after the company’s first-quarter earnings report on Thursday. The stock gained momentum on Friday nearly topping $39 before slipping 2 percent to $37.64 yesterday.

“We downgraded our recommendation because Choice was priced for perfection, and when the outlook came out we realized that it was less than perfect,” said Mr. LaFleur.

The company said net income for the first quarter ended March 31 fell 9 percent to $29.5 million (24 cents per diluted share) from $32.4 million (26 cents) a year ago.

But Mr. Katz said the stock is cheap and upgraded his firm’s valuation of the stock.

“The street is looking at macroeconomic factors and not looking at the specifics of the company,” said Mr. Katz.

Mr. Katz said that speculators are judging Choice Hotels unfairly by its revenue per available room percentage rather than focusing on the company’s unit growth.

“Revenue per available room is not the primary driver of the model, it’s much more about unit growth,” said Mr. Katz.

Choice’s unit growth increased 4.5 percent in the first quarter of 2007, while the company’s revenue per available room percentage only rose 1.4 percent in the first quarter, compared with 9.4 percent last year.

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