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Small-cap hotelier Red Lion Hotels (ticker: RLH) just struck a major deal. Last Tuesday, Red Lion announced it was buying Vantage Hospitality Group, one of the largest private hotel franchisors in the U.S.

The acquisition greatly expands Red Lion’s size and geographic reach. Vantage has about 1,000 hotels under its umbrella that include economy brands like American Best Value Inn and Lexington Inn & Suites.

The deal, which is expected to be accretive a year after closing, fits well with Red Lion’s strategy of growing its hotel base across the country through a focus on franchising. At the end of June, Red Lion had 114 hotels, with 80% franchised.

Investors were impressed by the announcement. Since last Tuesday, they’ve bid the stock up almost 10% to a recent $7.76. We see no reason to sell now. More upside looks likely, as Red Lion’s fast growing ways lead to higher earnings and cash flows.



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This column has covered Red Lion in the past, most recently in February, when we noted that the company had more than doubled its hotel network since 2014. The shares have soared 35% since our story.

Craig-Hallum’s Alex Fuhrman, one of the two Wall Street analysts who cover Red Lion, values the shares at $12, based on an enterprise value of 13.5 times his estimate of 2017 earnings before interest, taxes, depreciation and amortization (Ebitda). That’s a premium to peers, which go for about 11 times.

In a report published last week, Fuhrman noted that a premium valuation is warranted, given Red Lion’s growth prospects. He has yet to incorporate the acquisition into his estimates.

Once a regional operator located in the Pacific Northwest, two years ago Red Lion appointed a new CEO, industry veteran Greg Mount, and refocused on growth. The company sold stakes in its owned hotels, and it reinvested the proceeds in renovations and into expansion of its franchised network, a lower-cost business model than being an owner-operator.

In addition to the Pacific Northwest, Red Lion’s mid-scale and economy hotels are located in Florida, Georgia, New York, and Washington D.C., among other states, under brands such as Hotel RL, Red Lion Hotels, Guesthouse International, and Seattle Inn & Suites.

Revenue per available room, or RevPAR, has been steadily rising. In the June quarter, system-wide RevPAR rose 4.3%. Franchised hotels have been driving much of the growth. In the company’s operated hotels, renovations have weighed on results, but that could soon change. The majority of renovations are complete, and Red Lion could see improved productivity.

Fuhrman expects revenue per available room for company-operated hotels to rise 3.8% and 4.3% for the last two quarters of this year, compared to the 1.5% increase in the first half of the year. He looks for company-wide Ebitda to grow 44% to $18 million this year, on 16% higher sales of $165 million. In 2017, on his estimates, Ebitda could rise 22% on 11% sales growth.

The acquisition of Vantage transforms Red Lion into a national brand with more than 1,100 hotels. In the hotel business, which depends so much on scale, that reach will likely go a long way. That could mean good things ahead for the stock price. 
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 Red Lion Hotels Offers Lots of Room for Upside


