On Dec 6, 2014, Zacks Investment Research downgraded Extended Stay America, Inc. (STAY) to a Zacks Rank #5 (Strong Sell). Estimates have been declining ever since the company announced weak third-quarter 2014 results on Nov 7. Apart from missing the Zacks Consensus Estimate, the company lowered its revenue, EBITDA and net income guidance for 2014.
Why the Downgrade?
In the third quarter of 2014, Extended Stay’s paired earnings of 29 cents per share missed the Zacks Consensus Estimate of 34 cents by a nickel. Also, it decreased 6.5% year over year owing to lower-than-expected revenues and higher expenses. This hotelier posted net revenue of $334 million that also missed the Zacks Consensus Estimate of $345 million by 3.1%.
Total operating costs and expenses increased 5% to $225.0 million due to a 9.8% rise in hotel operating expenses.
Meanwhile, the company lowered its revenue, EBITDA and net income guidance for 2014. Total revenue is now expected in the range of $1.21 to $1.22 billion, up 6.8% to 7.3% year over year, as against the $1.21 to $1.25 billion range, up 7% to 10% from the year-ago period.
Adjusted EBITDA is expected in the range of $550 to $560 million, up 6% to 8% year on year versus $570.0 to $600.0 million, up 10% to 16% year over year. Further, it lowered the net income guidance for 2014 to a range of $145.5 to $154.9 million from $164.3 to $194.2 million.
In our view, Extended Stay is suffering from increased economic volatility, which should lower consumers’ discretionary expenditure on vacations, as well as the length of vacations, thereby hurting the company.
Other Stocks to Consider
Some better-ranked stocks in the hotel industry include Marriott International, Inc. (MAR), Hilton Worldwide Holdings Inc. (HLT) and Intercontinental Hotels Group plc (IHG). All these stocks have a Zacks Rank #2 (Buy).
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