There has been more bell than hop in shares of Home Inns & Hotels
Bears checking in with reservations have changed that. Then again, it's easy to lose the market's favor when you miss Wall Street estimates in each of your first five quarters as a public company. Home Inns has reversed that trend lately, but analysts are still talking down the company's near-term profit prospects. The stock now trades for a third of its 52-week high.
Last night's quarterly report was typical of Home Inns' recent performance. Top-line growth was explosive, soaring 93% to $65.3 million as a result of heady expansion. Home Inns opened 67 hotels in the past quarter alone, which is remarkable when we're talking about a company with just 366 locations, mostly leased and company-owned.
Earnings, on the other hand, were anemic. The company earned just $0.03 a share for the quarter -- though that figure jumps to $0.10 if you back out stock-based compensation and foreign exchange losses. On that adjusted basis, Wall Street was looking for a profit of just $0.07 a share on $62.6 million in revenue. After the sorry streak that kicked off its publicly traded tenure, Home Inns has now beaten the market's profit expectations in back-to-back quarters.
Obviously, expansion will hurt margins. Having so many new units on the book also drags down industry metrics like occupancy rates and RevPAR (revenue per available room), as fresh openings don't have time to be booked as solidly as older inns.
With the Olympics in China, travel plays may attract investor interest on theme alone. Home Inns has a presence in 79 different Chinese cities. It is a better play on the growing wealth within China, and on locals' appetite to explore their sizable nation.
The more obvious travel plays would be booking websites like Ctrip.com
Investors shouldn't ignore Home Inns, though. The bottom line may not look as glitzy as other Chinese Internet stocks with sexier margins, but Home Inns is paying the price now to be bigger later. With the Chinese economy still smoking with plenty of room to run, Home Inns may not be where the market's heart is, but it may be where your heart should be.
Ctrip is a Motley Fool Hidden Gems stock pick. If you want to know why, pack your bags and check in for a month-long stay. The 30-day trial subscription to the newsletter is free.
Longtime Fool contributor Rick Munarriz has been a fan of China's high-margin stocks for a long time. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. He does not own shares in any of the companies in this story. The Fool's disclosure policy leaves mints on your pillow.