Has Home Inns Grown Too Fast?

05/09/2012 4:27 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Fallout from the Chinese hotel chain’s purchase of a major rival could contribute heavily to earnings disappointments this quarter and next, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

Home Inns and Hotels Management (HMIN) has a slight case of indigestion. Or maybe I’d better say two cases of indigestion, since the discomfort that investors are probably feeling at the stock’s drop from $31.92 on March 2 to $22.51 at the close on May 8 comes from two different causes.

First, there’s the indigestion that comes from the company’s incredibly rapid expansion in 2011. Home Inns opened 306 new hotels under the Home Inns brand in 2011, and purchased another 307 hotels under the Motel 168 brand when it acquired that company in October 2011.

That makes 615 of the 1,426 hotels that the company ended the year with new to the company in 2011. New hotels take a while to build to capacity, and integrating an entire new 300-hotel brand doesn’t get accomplished overnight.

You could see the effect in Home Inns’ fourth-quarter 2011 earnings report. RevPAR (revenue per available room) fell to 141 renminbi in the fourth quarter, from 156 renminbi in the fourth quarter of 2010. If you excluded the acquired Motel 168 properties, RevPAR was better, but still fell to 153 renminbi.

The quarter to quarter comparisons were always going to be difficult, because in 2011 the company was comparing a quarter without the extra travel created by the 2010 Shanghai Expo. The event ended on October 31, 2010, so the fourth quarter of that year still received some boost from the event.

Fourth-quarter results reported on March 9 missed Wall Street expectations for earnings, although the company beat on revenue. You can find more on this earnings report in my March 13 post.

That quarterly disappointment would be old news, except that Home Inns is due to report first-quarter 2012 earnings on May 10—and because the company raised worries about its first-quarter results in its conference call in May.

At that point, the company raised guidance for 2012 revenue substantially from prior projections, but it conspicuously didn’t give earnings guidance. It’s only reasonable to wonder if the company might miss again on May 10.

Second, there’s the indigestion that comes from the May 3 registration of 8.2 million ADRs (American Depositary Receipts) for sale by investors who acquired them in the Motel 168 acquisition.

The two big institutional shareholders involved haven’t announced plans to sell on any particular schedule, but 8.2 million shares represents 16 times daily volume in Home Inns ADRs. That’s a lot of potential selling volume to have hanging over a stock.

I don’t think any of this changes the long-term reason to own Home Inns—this is a great way to invest in rising incomes in China and the increased travel that comes with it. But in the short term, investors are facing potentially painful volatility—and we’ll know more about how painful after earnings on May 10.

At the moment, I’m leaving my target price at $38 for December. That’s only a relatively modest $6 a share above where the stock traded before fourth-quarter 2011 earnings. I added these shares to my Jubak’s Picks portfolio on March 13—after that earnings disappointment—at $27.29, so I’ve got a 16% loss in Home Inns as of 3:30 p.m. New York time on May 9.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here.

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