Can Cost-Cut Efforts Favor Extended Stay (STAY) Q2 Earnings?

A generic image of a pen and on top of a chart. Credit: Shutterstock photo

Extended Stay America, Inc.STAY is scheduled to report second-quarter 2018 results on Jul 25, after market close.

The company's strategic efforts to drive growth such as cost-containment initiatives are expected to have favored second-quarter earnings, whereas revenues might have been affected by continual asset sale and limited international presence.

Extended Stay America's shares have gained 4.1% in the past six months against the industry 's collective decline of 15.1% in the same time period. The outperformance can be primarily attributed to the company's solid earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in eight of the preceding 10 quarters.

Let's discuss the factors that are likely to influence the company's second-quarter results.

Efficient Cost Management to Favor Earnings

Extended Stay's operating model proposes a low-cost capital structure that has low fixed and variable costs. Even though an ongoing increase in wages can substantially put pressure on the company's expenses, its cost-saving measures are expected to have driven earnings in the to-be-reported quarter. The company's earnings in the first quarter grew 33.5% year over year, partially backed by lower depreciation as well as interest expenses, and the trend is likely to have continued in the second quarter as well. Subsequently, the consensus estimate pegs the quarter's earnings at 34 cents, predicting a 9.7% increase from the prior-year quarter.

Promising RevPAR Growth

Extended Stay's efforts to drive its revenue per available room (ReVPAR) by providing suitable services to value-conscious business travelers are encouraging. In 2017, the company's ReVPAR increased 1.7% from the prior-year quarter on 1.1% growth in Average Daily Rate (ADR) and 40 basis points expansion in occupancy. The trend continued in first-quarter 2018, with RevPAR witnessing comparable system-wide growth of 3.7%. For the second quarter and 2018, Extended Stay America anticipates comparable system-wide RevPAR growth in the range of 1-3% each. The consensus estimate on the other hand projects second-quarter RevPAR growth of 1.9% from the year-ago quarter. RevPAR growth is expected to rise on a projected 3% increase in ADR.

Overall Top Line Likely to Suffer

Despite robust RevPAR growth, Extended Stay's overall revenues are likely to be hurt by continual asset disposition that the company has been undertaking as part of strategic initiatives to drive long-term growth. In February, the company closed a deal to sell 25 hotels to an affiliate of Three Wall Capital for $114 million. Also, lack of exposure in the emerging markets might limit its revenue growth potential. Consequently, the consensus estimate for second-quarter revenues is pegged at $336.3 million, reflecting a decline of 0.6% from the prior-year quarter.

Our Quantitative Model Predicts a Beat

Extended Stay has the right combination of two main ingredients - a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher - for increasing the odds of an earnings beat.

Zacks ESP: The company has an Earnings ESP of +3.38%. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank: Extended Stay currently has a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Extended Stay America, Inc. Price and EPS Surprise

Extended Stay America, Inc. Price and EPS Surprise | Extended Stay America, Inc. Quote

Other Stocks to Consider

Here are some other stocks from the Consumer Discretionary sector that investors may also consider, as our model shows that they have the right combination of elements to post an earnings beat in the to-be-reported quarter:

Pool Corp POOL carries a Zacks Rank #2 and has an Earnings ESP of +1.29%. The company is slated to report quarterly numbers on Jul 19.

Marriot Vacations Worldwide VAC has an Earnings ESP of +1.74% and a Zacks Rank #3. The company is anticipated to report quarterly numbers on Aug 2.

Royal Caribbean RCL has an Earnings ESP of +9.10% and holds a Zacks Rank #3. The company is expected to announce quarterly numbers on Aug 7.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.

See the pot trades we're targeting>>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Marriot Vacations Worldwide Corporation (VAC): Free Stock Analysis Report

Extended Stay America, Inc. (STAY): Free Stock Analysis Report

Pool Corporation (POOL): Free Stock Analysis Report

Royal Caribbean Cruises Ltd. (RCL): Free Stock Analysis Report

To read this article on Zacks.com click here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.