MKM Sees Pair Trade Between Lodging Pair InterContinental & Choice Hotels

In a report published Wednesday, MKM Partners analyst Christopher Agnew recommended

over

, citing better brands and better growth prospects of the former. Analyst Christopher Agnew upgraded InterContinental from Neutral to Buy, while raising the price target from $45 to $50. Agnew believes that InterContinental's solid franchising business, which represents 68 percent of operating earnings, is "undervalued" both on an absolute basis and relative to Choice Hotels. "IHG's portfolio of brands (Intercontinental, Kimpton, Holiday Inn), in our view, are superior to CHH's (Cambria, Comfort Inn, Quality Inn), and this has been expressed through unit growth with net room growth at IHG of 3.4% and 1.0% at CHH in 2014." While InterContinental's ROIC is improving, that for Choice Hotels is declining. Agnew estimated InterContinental's ROIC to have increased from 10 percent in 2003 to 37 percent in 2015. In the report MKM Partners noted, "We believe industry consolidation will continue, including M&A, and we believe IHG is the more likely participant whether acquirer (Kimpton), target or merger. We believe economics resulting from further consolidation are too attractive." Agnew maintained a Neutral rating for Choice Hotels, with a price target of $61, in view of the "favorable outlook for lodging."