Despite all the odds, consumers will continue to travel this summer. Here are the stocks you need to own
by trendswire · 26 May 2023
Americans may be cutting back on spending, but one thing they’re not willing to give up just yet is travel. Inflation-weary consumers are less likely to take out their wallets for discretionary purchases, several retailers reported this earnings season. That sentiment was echoed in a recent KPMG survey, which found that consumers expected to spend a smaller percentage of their monthly household budget this summer on essential and discretionary categories compared to winter 2023. Furniture, toys, and hobby supplies will experience the biggest drop. in spending, the survey found. However, despite all the odds, 61% of those surveyed said they plan to travel this summer, compared to 49% who said the same in the summer of 2021. KPMG’s Consumer Pulse survey was conducted from 21 to 26 April, with a representative sample of 1,003 consumers in the United States. “A lot of these trips and vacations were taken away over a period of two to three years,” said Matt Kramer, KPMG’s national consumer and retail sector leader. “They are reluctant to retire those treasured experiences and events.” That translates to outperformance for some names in the travel industry. “You’ve definitely seen a lot of travel stocks benefit from consumer spending this year,” said Sylvia Jablonski, chief executive officer and chief investment officer at Defiance ETF. The company’s Airlines, Hotels and Cruises (CRUZ) ETF is up 12% YTD in 2023, after losing 24% in 2022. For example, Royal Caribbean is up almost 58% YTD for the year, after losing 35.72% in 2022. Carnival has gained about 36% year-to-date, after losing almost 60% in 2022. Online travel site Booking Holdings is also outperforming the market overall, up about 29% year-to-date, with Marriott adding 15% year-to-date. Meanwhile, United Airlines is up nearly 26%. The Smart Traveler As consumer spending shifts from goods to services, fueling the post-pandemic travel recovery, they are also being smart about rising prices. “They’re just thinking about how they spend and where they booked their accommodation,” Kramer said. “I think you’ll see, just like grocery stores where consumers are willing to switch to lesser brands or private labels, they’ll do the same with their travel planning.” In fact, price is the top consideration travelers take into account when booking travel, according to a Morning Consult report on the state of travel and hospitality in the first half of 2023. Yet they are more likely to search less. expensive alternatives to canceling plans entirely. Some 48% of those surveyed by Morning Consult said they looked for cheaper options, up from 46% in July 2022, while 38% canceled plans, down from 40% who canceled in July 2022. Then there’s the effect of remote work, which has helped unlock travel demand. A separate survey by Morning Consult for the American Hotel & Lodging Association found that 86% of business travelers are interested in extending a work trip for leisure purposes, known as “bleisure” travel. Some 4,117 US adults were surveyed from April 28 to May 3. “Freed from the curse of a two-day weekend and with tools to work remotely, why not take a longer weekend trip and mix in some remote time on Zoom?” The Bernstein analyst David Vernon wrote in a note to clients earlier this month. Cruise ships are the last to bounce back After being shut down for over a year during the Covid-19 pandemic and then dealing with a slew of restrictions that kept passengers away, cruise lines are now on their way to perhaps the biggest recovery in travel this year, according to analysts. Price increases have yet to catch up with those for hotel rooms, for example, which means there is more room for prices to rise. It can also be a bargain for passengers. Royal Caribbean stands out as a top pick for UBS analyst Robin Farley. He, too, has a buy rating on Carnival, but the company has more European passengers than Royal Caribbean. The European consumer has not been as strong as its North American counterpart, he noted. RCL 5Y mountain Royal Caribbean’s 5-year performance In addition, Royal Caribbean has about 64% of its cruises in the Caribbean, which is a very strong market. It also has a private island, CocoCay, with features like a water park, zip line, and hot air balloons contributing to Royal’s revenue. Farley raised his price target for the shares earlier this month to $103 a share from $91, suggesting the stock could rise 32% from Thursday’s close. Meanwhile, Citi analyst James Hardiman is bullish on Carnival. He upgraded the stock to buy from neutral on Thursday and raised his price target to $14 a share from $10, implying a 27% gain from Thursday’s close. CCL 5Y Mountain Carnival’s 5-Year Performance Carnival’s bottom line is at an inflection point, Hardiman said, with the opportunity to become “significantly ‘less ugly’ in the coming years.” Carnival’s namesake brand is also going strong, which is early evidence that CEO Josh Weinstein’s turnaround story is working, he added. ‘Improvement in all regions of the world’ Hotels are further along in their recovery from the pandemic. Average hotel occupancy is expected to reach 63.8% in 2023, just shy of the 65.9% reached in 2019, according to the AHLA. Prices are still rising, though not as much as in 2022, when the industry’s average daily rate (ADR) and revenue per available room (RevPAR) were the highest of any year on record, according to hotel data firm STR. In April 2023, the ADR rose 3.4%, while the RevPar rose 1.9%. Demand appears to be holding up despite those higher rates. About 56% of adults are more likely to stay in a hotel this summer than they are in 2022, according to the AHLA/Morning Consult survey. Of those surveyed, 55% expect to take more frequent vacation trips and 52% plan longer stays. That strength was also seen during this season’s earnings reports. “We saw improvements in every region of the world,” Marriott International CEO Tony Capuano told CNBC after his first-quarter earnings report earlier this month. That sentiment was echoed by Hilton Worldwide CEO Chris Nassetta, who told CNBC that following the company’s profit surge in April, the hotel is going strong across all segments: leisure, business, and meetings and events. He cited pent-up demand from business travelers and the secular shift toward spending on experiences and travel rather than other discretionary purchases. Inbound international travel, which is only at about half of 2019 levels, should pick up again as well. Not only is China reopening, but the US Travel Association, which Nassetta chairs, is working with the Biden administration and the State Department to reduce massive wait times for visas. “There is a tremendous amount of upside potential in international travel over the next six to 24 months,” he said. Hilton is Farley’s first pick from UBS. “Hilton has very few assets… Most of their business is renting out their brand flags and they’ve shown how resilient they can be in the pandemic,” he said. “It’s a safer place to hide if there’s a downturn, because they mostly share the top line and they’re not capital intensive.” However, Marriott is Defiance ETF’s Jablonski’s favorite play. “Marriott is expanding. So, they’ve expanded their occupancy, they’ve expanded their hotel chain, their timeshare properties, their residential properties,” he said. “Their EPS pretty much doubled last quarter and they’ve had double-digit revenue growth as well.” Online Travel Stocks While Airbnb also reported rising first-quarter earnings, its cautious outlook for the current quarter sent shares lower earlier this month. CEO Brian Chesky told CNBC the caution stems from the affordability pressure he is experiencing in North America. “With inflation, people are more focused than ever on affordability,” he said in an interview with “Squawk on the Street.” “We’re really focused on trying to make sure that prices are modulated in North America.” For Jablonski, the recent pullback makes the stock attractive. While Airbnb is up 22% year-to-date, it has lost nearly 18% since reporting earnings on May 9, as of Thursday’s close. “The stock is very fair value. It’s trading at eight and a half times sales and if you look at that company compared to other stocks, it’s a screamer,” he said. “They have a much lower multiple than the average airline stock, they have very high levels of free cash flow.” The stock has an average overweight rating and a nearly 23% lead over analysts’ average price target, according to FactSet. Booking Holdings is also a favorite among analysts, with an average Overweight rating and a 10% lead over the average price target, according to FactSet. Evercore ISI’s Mark Mahaney is among those bullish on the online travel company. Booking reported earnings and revenue for the first quarter in early May, but its adjusted earnings before interest, taxes, depreciation and amortization missed estimates, according to StreetAccount. Mahaney continues to like Booking for its strategic investments, which should support growth, and the progress the company has made in driving more traffic directly to its site. He also believes that his valuation is inherently attractive. “There is a clear risk of consumer discretionary spending here, but strong valuation support should help, along with a management team and business model that have been thoroughly tested over the past 20 years,” he wrote in a May 5 note. of May. European travel ‘out of cars’ Then there are the airlines, which have experienced demand, even amid high airfares. While prices remain high, the latest Consumer Price Index for April showed the airline fare index fell 2.6% month-on-month, after rising in February and March. Airlines are essentially sold out for summer travel, according to Helane Becker, an analyst at TD Cowen. She forecasts that around 275 million people will travel between Thursday, May 25, and Monday, September 4. The three well-positioned names at the moment are United, Delta Air Lines and Copa Holdings, parent of the Panamanian airline Copa Airlines, Becker said. Her best idea for 2023 is United, for its international flights. While 2021 and 2022 were about the recovery of US domestic travel, 2022 and 2023 are about the recovery of European flights, and this year and next are about the recovery in Asia, she said. “Travel to Europe this summer is going to be off the charts. Demand is very strong, especially given the strong dollar. Asia should start to pick up,” she said. — CNBC’s Michael Bloom and Ashley Capoot contributed reporting.
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