Lebenthal Calls Extended Stay's Valuation 'Compelling,' But Sees Little Upside In Stock

In a report published Wednesday, Lebenthal analyst Diana Katz initiated coverage of

with a Hold rating and a price target of $19. Extended Stay is the largest owner of company branded hotels in North America. The company is a leader in the extended stay economy-scale category. The company needs to enhance room rates at its renovated hotels to partially close the ADR gap with competitors. "By keeping costs low, it can maintain high EBITDA margins and flow through and generate a high FCF and dividend yield," analyst Diana Katz mentioned. Extended Stay's current stock valuation is very attractive, but investor sentiment remains negative related to the company's ability to accelerate renovations and reset room rates, Katz pointed out. Higher RevPAR growth should allow the company to overcome its market underperformance in the non-renovated hotel segment. Katz believes that it could "take until the end of 2015" for the non-renovated piece to be "significantly brought down" to 25 percent of the portfolio, which would offer "greater visibility." In the report Lebenthal noted, "We will come off the sidelines sooner if there is more evidence that overall expected RevPAR growth is achievable and sustainable (in a still expanding lodging cycle)."