Extended Stay America (NYSE:STAY) is a company that specializes in affordable extended stay hotel experiences. The company operates over 684 hotels throughout the United States and Canada. The company is headquartered in Charlotte, North Carolina. Given recent trends I have noticed, as well as my interest in the hotel sector I felt I would analyze the stock as a potential investment.
In regards to trends that I have noticed through speaking to people in both my local circles but also national circles, vacation expenditures for summer 2014 have been strong. Although Extended Stay does not necessarily cater itself to vacationers only, recent economic development in many parts of the country has also led to employees being temporarily stationed in different areas of the country. Particularly in the technology sector, there are a lot of companies that are sending employees on remote trips for business and utilizing Extended Stay hotels to be able to do so. Companies are increasingly becoming more expecting their employees to be more mobile, primarily due to large changes in technology over the last few decades. Working from remote locations has become easier than ever, which means that employees periodically traveling to various remote locations may be necessary for some businesses.
Extended Stay proved my observations are at least partially correct by reporting strong earnings recently. The company had revenue increase by 9.6% to $321.9 million, as well as increased margins and net income. Net income increased by roughly 23.3% or $8.8 million bringing it to $46.3 million.
Despite the potential positives, there are some drawbacks to investing in Extended Stay as well. One of the largest downsides in my opinion is the lack of history for the company. The company has only been public for a short period of time. A lack of history and performance history can make judging future revenues and performance more difficult. Looking at the stock history that it has had so far, the performance has been less than stellar. Although it has only been since 2013, the stock has underperformed on the market. It is important to point out that this is not necessarily a fair comparison, given the short time horizon of the performance being analyzed.
The underperformance isn't the only risk with Extended Stay however. The price to earnings ratio for the company seems overvalued, at 49.3 according to Morningstar. From a valuation standpoint the company is trading at a P/E Ratio higher than its competitors average of 34.6, and higher than the S&P 500 average of 18.2. Considering the recent market volatility and current overall market valuation, it appears Extended Stay may be overvalued at current levels.
The economic volatility can of course affect the company in many different ways. Increased economic volatility can decrease the amount of discretionary income consumers spend on vacations, decrease the length of vacations, and can also decrease the amount of money that a company may be willing to spend to send an employee to a different location. All three of these factors could hurt hotel revenues. Much of this risk is out of the control of the company, but still needs to be considered.
The last risk I'll mention is that the company has continued to offer additional stock offerings. The company was recently in the news for offering 21 million shares in conjunction with ESH Hospitality, which is a subsidiary of Extended Stay.
In conclusion, there isn't a real compelling reason to buy into Extended Stay stock at current levels. The market volatility could lead to some depressed prices in all stocks, and potential economic volatility could hurt the company even further. Given the lack of history for this company, the risk and reward profile doesn't seem favorable enough for me at present time. Investors may be wise to consider other stocks for the time being.
This article is given for informational purposes only and is not to be construed as investment advice. Contact your investment professional and do your own due diligence before investing.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.