UPDATE: Citigroup Downgrades Choice Hotels on Valuation
In a report published Monday, Citigroup analyst Joshua Attie downgraded Choice Hotels (NYSE: CHH) from Buy to Neutral, but reiterated the $43.00 price target.
In the report, Citigroup noted, “We are downgrading CHH shares to Neutral from Buy. There are two reasons for our downgrade. First, CHH shares have outperformed year-to-date (+28%), are trading close to our price target and valuation seems fair (~22x EPS). Second, we feel the company's technology investments are reducing earnings visibility and creating volatility. One of the key tenets of our Buy thesis had been the stability and consistency of CHH's earnings, which are driven primarily by high margin franchise fees. We recognize that the amount being spent on Sky Touch this year ($12-$14m) is not unreasonable in the context of annual free cash flow (>$100m) and that earnings volatility is due to conservative accounting (expensed vs. capitalized). At the same time, the return/success of the investment in a cloud based reservation system is difficult for us to analyze. We feel that it may be difficult for the shares to continue to outperform in the face of earnings volatility, given what is a fair valuation.”
Choice Hotels closed on Friday at $42.10.
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