Morgan Stanley Says Extended Stay Is Undervalued By Investors

The lodging industry has seen multiple M&A and strategic optionality deals over the past year and investors are likely undervaluing Extended Stay America Inc (NYSE: STAY)'s ability to create value, according to Morgan Stanley.

The Analyst

Morgan Stanley's Thomas Allen upgraded Extended Stay America from Equal-weight to Overweight with a price target lifted from $21 to $23.

The Thesis

One of the more recent deals in the lodging industry consists of Wyndham buying the "La Quinta" brand, a move that prompted La Quinta to be one of the best performing stocks within the group over the past six months, Allen said in a note.

There are a few scenarios available to Extended Stay that may generate similar outperformance in the stock, including:

• Selling itself to a larger multi-brand lodging company that can pay a high multiple to realize "significant" synergies;
• Create a residual standalone REIT that would trade at a higher EBITDA multiple as it would target a different investor group; and
• The residual REIT could benefit from being part of a larger brand network for the first time.

There's no indication any of these scenarios are being considered by Extended Stay's management team, the analyst wrote. Allen said the management team suggested at a recent conference "it's a possibility" that some form of separation of its real estate and M&F business may occur.

Bottom line, Extended Stay's business is "undervalued" in its current asset-heavy structure.

Price Action

Shares of Extended Stay America were trading higher by more than 6 percent Thursday at $21.04.

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