5 travel stocks to buy as Americans hit the road

Travel stocks are expected to enjoy a massive tailwind as more Americans are immunized against COVID ... and Wall Street knows it.

  • By Deborah Yao,
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Americans are hankering to get back on the road again after a year of pandemic-induced staycations. Thanks to vaccinations rolling out nationwide, they'll increasingly be able to do that – putting the spotlight on travel stocks. Specifically, pent-up demand brought about by cabin fever should start to buoy airlines, hotels and leisure stocks over the next year-plus.

The U.S. economy is forecasted to bounce back in 2021 by a robust 5.6% before inflation, after declining the prior year, according to the Congressional Budget Office. That's expected to be bolstered in part by a significant recovery in consumer discretionary spending.

Discretionary spend is estimated to be a $2 trillion market, of which around 60% can be categorized as "experiences" around travel, restaurants, and leisure activities, according to a February 2021 report from BofA Global Research. The rest of discretionary spending consists of purchases of material goods such as apparel and home furnishings. From 2007 to 2019, consumers have been shifting their spending to "experiences" from purchases of goods. "We see this shift as a mega trend, as the consumer has shifted ... $240 billion annually to Experiences in the last 20 years," BofA analysts say.

Annual spending on leisure experiences grew by 4.1% over the period compared with 1.8% for purchases of goods, driven by demographics, changing tastes and social media posts. Restaurants, leisure and travel comprise 89% of experiences spending.

Here are five of the best travel stocks for the long run as travel activities resume in force. While companies that offer travel experiences had a rough 2020 – think airlines, hotels and cruise ships – 2021 is expected to be much more accommodative. Just one caveat: Many of the companies in this space are trading at lofty levels in this overheated market. Opportunists should look for pullbacks before investing.

Data is as of the market close on Feb. 24. Market cap, fair value and five-year average gross margin information are provided by Morningstar.

Expedia Group

Market capitalization: $23.8 billion

Fair value: $143

5-year average gross margin: 80.5%

Expedia Group (EXPE) is the largest online travel agency in the U.S., operating under its namesake brand, as well as Hotels.com, Travelocity, Orbitz, Hotwire, CheapTickets, Vrbo, Trivago, Egencia, Ebookers, CarRentals.com, Expedia Cruises and WotIf.

This vast network drives a strong user base that will benefit Expedia over the next decade, says Morningstar analyst Dan Wasiolek. The company also is expanding its international presence, including a partnership with Trip.com (TCOM) in China.

"This is crucial, as we think China will contribute around 30% of industry online booking growth over the next five years," Wasiolek says.

What gives Expedia a competitive advantage is its network of 2.9 million accommodations that provides plenty of options for travelers, the analyst says. Nearly 80% of its revenue comes from lodging. Moreover, its iOS mobile app ranks among the top 10 for travel in 11 countries compared with No. 16 for TripAdvisor (TRIP) and No. 128 for Booking.com (BKNG). Expedia's size also gives it advertising clout – it spent $5 billion in direct marketing in 2019 as did Booking.com – further enhancing its market position.

Meanwhile, Expedia has been getting its house in shape: It has been reducing costs and reinvesting the savings into enhancing customer experience and loyalty. Strategically, Expedia has been shifting from what the analyst calls an "inefficient" approach of investing in every brand in all areas towards targeting brands that resonate regionally with travelers. Further, the company is focusing on shared data analytics among its brand portfolio, a simplified user experience, and a connected trip offering, "all of which makes strategic sense," he added.

Wasiolek sees a full recovery in Expedia's business by 2023. The only downside is that shares of Expedia are trading above Morningstar's fair value of $143 in this overheated market. So like the other travel stocks on this list, it might pay to be patient before jumping in.

Walt Disney

Market capitalization: $358.6 billion

Fair value: $154

5-year average gross margin: 42.2%

Walt Disney (DIS) is firing on all cylinders on the direct-to-consumer (DTC) front, with its Disney+ streaming service now reaching nearly 95 million subscribers at the end of its fiscal first quarter. That's quadruple the subscribers the company reported in December 2019, blowing through its prior forecast of 60 million to 90 million. Disney now expects to sign up 230 million to 260 million Disney+ subscribers by 2024.

Once you count Hulu and ESPN+, Disney now reaches more than 146 million streaming subscribers. Disney recently launched a Star international offering in Europe, Canada, Australia, New Zealand and Singapore, as well. Eastern Europe and Asia will be on tap later this year.

Meanwhile, in spite of limits to capacity or closures for its theme parks, BofA analyst Jessica Reif Ehrlich says she is "encouraged" by the company's effective cost and yield management, which should drive operating leverage as parks begin to reopen and accommodate more visitors. BofA raised its revenue and adjusted earnings per share estimates for Disney and reiterated a Buy rating.

Key near-term catalysts are theme park reopenings aided by increased vaccinations, DTC rollouts and prices increases, and resumption of theatrical releases.

"Despite near-term COVID pressures, we believe DIS is well-positioned for the recovery driven by robust DTC traction, launch of a Star Intl. offering … and (long-term) theme park operating leverage," Ehrlich says.

Alaska Air Group

Market capitalization: $8.3 billion

Fair value: N/A

5-Year average gross margin: 25.9%

In this overheated market, few stocks still trade below their pre-COVID enterprise value (EV) levels. But travel stocks such as airlines have been an exception, with about half of carriers still valued below their pre-COVID market cap, according to Raymond James research.

"Although consumer air travel is likely to recover quickly, business and international travel will probably take longer, which likely accounts for more investor skepticism about the group," Raymond James' analysts said.

But the industry got a recent lift after Deutsche Bank analyst Michael Linenberg upgraded the group on Feb. 22, saying carriers were "back on track." He notes that "COVID cases, hospitalizations, and vaccination rates are all trending in the right direction."

Linenberg says he is encouraged by the airlines' "nonstop pursuit of numerous initiatives to mitigate the spread of COVID and increase the confidence of the flying public." He adds that since the onset of the coronavirus, "we have observed numerous instances of pent-up demand for air travel, particularly around peak periods and peak travel days, underscoring our view that consumers want to travel."

One stocks Linenberg likes is Alaska Air Group (ALK), which he upgraded from Hold to Buy, with a $75 price target. The airline is also one of only 16 non-real estate investment trust (REIT) companies rated a Strong Buy or Outperform by Raymond James that have recently been trading below their pre-COVID EV levels.

"We are not out of the woods, but we are seeing signs of brighter days ahead," Alaska Air Group CEO Brad Tilden said in the company's most recent earnings report. "We're positioned to come out of this crisis with our balance sheet unimpaired and our competitive advantage intact, and both of these set us up for a strong future and a long runway for growth."

Avis Budget Group

Market capitalization: $3.8 billion

Fair value: $47.54

5-Year average gross margin: 76%

BofA analyst Aileen Smith says Avis Budget Group (CAR) is a Buy, noting the rental car company's better-than-expected fourth-quarter 2020 financial results. Avis, which operates under its namesake and Budget brands, is one of the largest rental car companies in the world. It also offers car-sharing services through Zipcar, as well as commercial truck rentals through Budget Truck.

Smith says the rental car industry is at an "inflection point in volumes" following the market trough in the second quarter of 2020. Avis stands to benefit through its business turnaround and transformation efforts to "drive a significant recovery in profits and cash flow" and use the funds to lower debt and provide "potentially significant upside to equity shareholders," Smith adds.

She also believes there is an investment opportunity stemming from Wall Street's confusion over two announcements: a $600 million unsecured notes offering to redeem $500 million of expensive secured notes, and an agreement to sell up to 10 million common shares through an "at the market" program. These two pieces of news drove an immediate sell off in the stock presuming equity dilution. Smith argues that they should be viewed separately.

The debt offering will be used to replace more expensive debt coming due soon and lower the company's interest payments. The equity offering is a move to position Avis for opportunistic equity raises in the future. Confusion over these two announcements, the coming recovery in demand and ongoing cost containment at Avis make this travel stock attractive, she says.

Notably, Avis biggest competitor, Hertz (HTZGQ), remains in Chapter 11 bankruptcy.

Wyndham Hotels & Resorts

Market capitalization: $6.3 billion

Fair value: $64

5-Year average gross margin: 45%

The sketchy outlook for business travel accommodations actually bodes well for Wyndham Hotels & Resorts (WH). The world's largest franchised hotel chain focuses on budget and leisure travelers, operating under the brands of Wyndham, Ramada, La Quinta, Days Inn, Tryp, Microtel, Howard Johnson, Travelodge, AmericInn, Trademark, Super 8, and others.

In its February 2021 investor presentation, the company said nearly 70% of its guests are leisure travelers. In the U.S., 87% of its hotels are located within driving distance of cities and 96% of guests originate domestically.

Wyndham has about a 40% share of all U.S. economy and midscale branded hotels, according to Wasiolek's commentary on Feb. 16. Among midscale hotels, a "handful" of Wyndham's brands were among the top 10 garnering the highest guest satisfaction ratings as measured by J.D. Power, he wrote.

Wasiolek also noted that Wyndham also has an "attractive" recurring-fee business model since essentially all of its nearly 9,000 hotels are either franchised or managed, generating "healthy" returns on invested capital since these "asset-light" arrangements come with low fixed costs and capital spending requirements.

Moreover, Wyndham's guest loyalty program is the fourth largest in the industry at 86 million members, trailing only Marriott (MAR), InterContinental Hotels Group (IHG), and Hilton (HLT). Guests are attracted to its program because they have a large variety of hotel chains to choose from to accumulate points. Members stay at Wyndham twice as much and spend nearly double than non-members.

All of these factors combine to make WH one of the best-looking travel stocks on the market today.

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© 2021 The Kiplinger Washington Editors, Inc.
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