Choice Hotels (CHH)

Hotel franchisor Choice Hotels (NYSE:CHH) reported Q3 CY2025 results exceeding the market’s revenue expectations, with sales up 4.5% year on year to $447.3 million. Its non-GAAP profit of $2.10 per share was 4.4% below 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.

Airlines, hotels, resorts, and cruise line companies often sell experiences rather than tangible products, and in the last decade-plus, consumers have slowly shifted from buying "things" (wasteful) to buying "experiences" (memorable). In addition, the internet has introduced new ways of approaching leisure and lodging such as booking homes and longer-term accommodations. Traditional airlines, hotel, resorts, and cruise line companies must innovate to stay relevant in a market rife with innovation.

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.

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Choice Hotels grew its sales at a 13.5% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.

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 1.6% over the last two years was below its five-year trend.

We can dig further into the company’s revenue dynamics by analyzing its revenue per available room, which clocked in at $60.33 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 averaged 2.2% year-on-year declines. 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.

This quarter, Choice Hotels reported modest year-on-year revenue growth of 4.5% but beat Wall Street’s estimates by 7.6%.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months, a slight deceleration versus the last two years. This projection is underwhelming and suggests its products and services will face some demand challenges.

Choice Hotels’s operating margin has risen over the last 12 months and averaged 26.9% over the last two years. On top of that, its profitability was elite for a consumer discretionary business thanks to its efficient cost structure and economies of scale.

In Q3, Choice Hotels generated an operating margin profit margin of 31.8%, down 3.6 percentage points year on year. This contraction shows it was less efficient because its expenses grew faster than its revenue.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Choice Hotels’s EPS grew at a spectacular 22.8% compounded annual growth rate over the last five years, higher than its 13.5% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

In Q3, Choice Hotels reported adjusted EPS of $2.10, down from $2.23 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term adjusted EPS growth than short-term movements. Over the next 12 months, Wall Street expects Choice Hotels’s full-year EPS of $6.91 to grow 4.1%.

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 mediocre cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 8.9%, subpar for a consumer discretionary business. The divergence from its good operating margin stems from its capital-intensive business model, which requires Choice Hotels to make large cash investments in working capital and capital expenditures.

Choice Hotels’s free cash flow clocked in at $60.09 million in Q3, equivalent to a 13.4% margin. The company’s cash profitability regressed as it was 5.6 percentage points lower than in the same quarter last year, but it’s still above its two-year average. We wouldn’t put too much weight on this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends are more important.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Choice Hotels hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 26.7%, splendid for a consumer discretionary business.

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. Unfortunately, Choice Hotels’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Choice Hotels reported $52.58 million of cash and $2.03 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 $625.1 million of EBITDA over the last 12 months, we view Choice Hotels’s 3.2× net-debt-to-EBITDA ratio as safe. We also see its $82 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. On the other hand, its EPS missed and full-year EPS guidance was lowered. Overall, this print was mixed. The stock remained flat at $91.99 immediately following the results.

Updated: December 3, 2025 at 10:00 PM EST

When considering an investment in Choice Hotels, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Choice Hotels doesn’t pass our quality test. For starters, its revenue growth was weak over the last five years, and analysts expect its demand to deteriorate over the next 12 months. 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 12.8x. While this valuation is fair, the upside isn’t great compared to the potential downside. There are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $109.27 on the company (compared to the current share price of $91.69).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.