La Quinta Could Be Left With 27% Upside Following Next Year's Spinoff

Wells Fargo Securities said La Quinta Holdings Inc (NYSE: LQ) shares could be worth $22 per share after the 2018 spinoff of its real estate to a newly formed REIT. The price target represents roughly 27 percent upside from current levels.

As such, the firm upgraded shares of La Quinta from Market Perform to Outperform and lifted its price target from $14.50 to $22. The actions are based on perception of a favorable upside vs. downside scenario.

At time of writing, shares of La Quinta were surging up 4 percent to $17.95.

Analyst Jeffrey Donnelly noted that on July 26, La Quinta filed its initial Form10 detailing, the prospective split of La Quinta Holdings into CorePoint Lodging and New La Quinta brand.

The analyst believes CorePoint, as an independent entity, is worth $8.75 per share. Also, the analyst values the New La Quinta at $16 per share, if a larger, multi-brand family structured a leverage-neutral 7 percent, plus, earnings per share acquisition, assuming significant expense synergies.

See also: How to Start Investing in Real Estate

The analyst indicated that his $24.75 per share gross estimate is reduced by transaction-related costs and a one-time tax on the capital gain, stemming from the real estate spinoff. This would mean a net estimate of $22 per share, the analyst said (see his track record here).

However, if New La Quinta is not a candidate for consolidation, either due to recession or the inability to find a suitable suitor, Wells Fargo values the combined La Quinta and CorePoint at $15-$16 per share, down about 7-13 percent below current levels.

Meanwhile, the firm raised its 2017 and 2018 earnings per share estimates from 38 cents each to 42 and 43 cents, respectively.

The firm attributed the revisions to its expectation that the aftermath of hurricanes Harvey and Irma could provide an extended benefit to earnings in 2017-18.

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Image Credit: By Mr. Satterly (Own work) [WTFPL], via Wikimedia Commons