Check in at Extended Stay

02/12/2016 8:00 am EST

Focus: STOCKS

George Putnam

Editor, The Turnaround Letter

Our latest featured turnaround stock is one of the largest owner/operators of hotels in North America with 682 hotels offering 76,000 rooms, explains George Putnam, editor of The Turnaround Letter

As its name suggests, Extended Stay America (STAY) focuses on the extended stay market and it dominates the mid-priced segment with a market share exceeding 50%.

Extended Stay had an initial public offering in late 2013 and surged to $25 per share. Then the stock began a long, generally slow decline.

In November, the decline accelerated and the stock has lost almost one third of its value over the last three months.

Meanwhile, we believe that the stock has a lot to recommend it; the company has a dominant brand, its hotels are in high quality locations, and management is taking steps to increase revenues and improve profitability. 

Extended Stay is well along in a six-year program to renovate all of its rooms with completion expected in early 2017. 

Extended Stay generates solid cash flow and it is using this cash generation to reduce leverage and compensate shareholders. Its ratio of net debt to cash flow has been cut roughly in half since 2012. 

Also, the company has raised its dividend each of the last two years so that the stock now yields a generous 5.3%. 

Finally, we like the fact that Extended Stay has some large, heavy-hitting shareholders. Hedge fund firms Paulson & Co. and Centerbridge Partners, together with private equity giant Blackstone Group, own a combined 70% of the outstanding stock.

We believe that the recent decline in Extended Stay’s stock presents an opportunity to pick up a strong, market-leading company with good growth prospects at a very cheap price. We recommend buying the stock up to 16.

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