Choice Hotels (CHH)

Hotel franchisor Choice Hotels (NYSE:CHH) reported Q4 CY2025 results exceeding the market’s revenue expectations, but sales were flat year on year at $390.2 million. Its non-GAAP profit of $1.60 per share was 3.7% above analysts’ consensus estimates.

Company Overview

With almost 100% of its properties under franchise agreements, Choice Hotels (NYSE:CHH) is a hotel franchisor known for its diverse brand portfolio including Comfort Inn, Quality Inn, and Clarion.

The Consumer Discretionary sector, by definition, is made up of companies selling non-essential goods and services. When economic conditions deteriorate or tastes shift, consumers can easily cut back or eliminate these purchases. For long-term investors with five-year holding periods, this creates a structural challenge: the sector is inherently hit-driven, with low switching costs and fickle customers. As a result, only a handful of companies can reliably grow demand and compound earnings over long periods, which is why our bar is high and High Quality ratings are rare.

Travel and vacation providers operate tour packages, cruise lines, online travel agencies, and vacation rental platforms, connecting consumers with leisure and business travel experiences. Tailwinds include robust post-pandemic travel demand, a consumer preference shift toward experiences over goods, and technology-enabled personalization improving conversion and loyalty. However, headwinds are significant: the industry is acutely sensitive to macroeconomic cycles, geopolitical instability, and fuel price volatility. Low switching costs mean fierce price competition, while capacity additions in segments like cruises can lead to oversupply. Regulatory burdens, weather disruptions, and public health risks further create episodic but potentially severe demand shocks.

Choice Hotels's primary competitors include Marriott International (NASDAQ:MAR), Hilton Worldwide Holdings (NYSE:HLT), InterContinental Hotels Group PLC (NYSE:IHG), Wyndham Hotels & Resorts (NYSE:WH), and private company Best Western Hotels & Resorts.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Choice Hotels grew its sales at a 15.6% annual rate. Though this growth is acceptable on an absolute basis, we need to see more than just topline growth for the consumer discretionary sector, which can display significant earnings volatility. This means our bar for the sector is particularly high, reflecting the non-essential and hit-driven nature of the products and services offered. Additionally, five-year CAGR starts around Covid, when revenue was depressed then rebounded.

We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new property or trend. Choice Hotels’s recent performance shows its demand has slowed as its annualized revenue growth of 1.7% over the last two years was below its five-year trend. We’re wary when companies in the sector see decelerations in revenue growth, as it could signal changing consumer tastes aided by low switching costs.

We can better understand the company’s revenue dynamics by analyzing its revenue per available room, which clocked in at $49.82 this quarter and is a key metric accounting for daily rates and occupancy levels. Over the last two years, Choice Hotels’s revenue per room was flat. Because this number is lower than its revenue growth, we can see its sales from other areas like restaurants, bars, and amenities outperformed its room bookings. It is sometimes the strategy of hotels to grow ancillary revenues because they are price takers in room revenues.

This quarter, Choice Hotels’s $390.2 million of revenue was flat year on year but beat Wall Street’s estimates by 5.4%.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months. This projection is underwhelming and suggests its products and services will see some demand headwinds.

Choice Hotels’s operating margin has been trending down over the last 12 months and averaged 28.7% over the last two years. The company’s profitability was mediocre for a consumer discretionary business and shows it couldn’t pass its higher operating expenses onto its customers.

In Q4, Choice Hotels generated an operating margin profit margin of 26%, down 4.6 percentage points year on year. This contraction shows it was less efficient because its expenses increased relative to its revenue.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Choice Hotels’s EPS grew at an unimpressive 27.6% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 15.6% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.

In Q4, Choice Hotels reported adjusted EPS of $1.60, up from $1.55 in the same quarter last year. This print beat analysts’ estimates by 3.7%. Over the next 12 months, Wall Street expects Choice Hotels’s full-year EPS of $6.96 to grow 3.1%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Choice Hotels has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 10.1%, lousy for a consumer discretionary business.

Choice Hotels’s free cash flow clocked in at $73.69 million in Q4, equivalent to a 18.9% margin. This result was good as its margin was 5.6 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Choice Hotels historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 26.8%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Choice Hotels’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Choice Hotels reported $45 million of cash and $1.91 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $625.6 million of EBITDA over the last 12 months, we view Choice Hotels’s 3.0× net-debt-to-EBITDA ratio as safe. We also see its $84.91 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing Choice Hotels beat analysts’ revenue expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. Overall, this print had some key positives. The stock traded up 2% to $111.58 immediately following the results.

Updated: February 19, 2026 at 6:48 AM EST

Before investing in or passing on Choice Hotels, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

Choice Hotels falls short of our quality standards. On top of that, Choice Hotels’s revenue per room has disappointed, and its projected EPS for the next year is lacking.

Choice Hotels’s P/E ratio based on the next 12 months is 15.3x. This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $108 on the company (compared to the current share price of $111.58).