sábado, 9 de enero de 2021

sábado, enero 09, 2021

Try These 6 Travel and Leisure Stocks to Play a Vaccine-Driven Rebound in Demand

By Lawrence C. Strauss

     Photograph by Andrew B. Myers; (background) Suttipong Sutiratanachai/Getty Images


Corporate travel has fallen off a cliff during the pandemic, taking airline traffic with it. 

The Las Vegas Strip, ordinarily bustling with conference-goers and leisure travelers alike, more resembles a quiet resort town than the 24/7 hive of activity it usually is. No cruise ships—aside from some Covid-stricken stragglers—have embarked from or entered U.S. ports since mid-March.

Even domestic leisure travel, a relatively bright spot over the summer and into the fall, is coming up against a surge of Covid-19 cases and a fresh round of travel and commercial restrictions around the country. 

Pennsylvania, for instance, recently closed its casinos for the second time this year to combat the spread of the coronavirus. Nearly 70% of Americans said they wouldn’t travel for Christmas, according to a recent survey commissioned by the American Hotel & Lodging Association.

It’s not exactly a picture postcard for travel and tourism these days.

And yet, travel and leisure stocks—including cruise, lodging, casino, and time-share names—have been on a tear. Some are up 20% or more in recent weeks, though many remain down on the year. 

A big impetus came in early November when promising news about the efficacy of Covid-19 vaccines began to emerge, and the good feelings continued with the approval and rollout of vaccines.

“It’s a belief that travel will come back,” Geoffrey Ballotti, CEO of Wyndham Hotels & Resorts (ticker: WH), tells Barron’s. “It’s a belief that people want to get out of the house. They want to travel. They want to see things come back to normal.”

Still, while the vaccines should pave the way for better times and earnings across the travel and tourism industry, the speed and takeup of the rollout are wild cards. Many Americans have seen their incomes and travel budgets take a hit, and there is also sure to be some lingering skittishness among people and businesses. Investors, then, need to have a framework.

“From a high level, the way we have gone about this, No. 1, is thinking about leisure versus business, No. 2, driving versus air travel and, No. 3, outdoors versus indoors,” says David Katz, a leisure and gaming analyst at Jefferies.

Katz expects leisure and business travelers will unleash a lot of pent-up demand, starting in the middle of 2021 and extending into early 2022. They “will be looking to get out and travel and get caught up,” he says.

With that in mind, investors shouldn’t fret that they’ve missed the boat. For one thing, there are sure to be pullbacks after the rally as pandemic news ebbs and flows. What’s more, some sectors will rebound more quickly than others and there could be bargains among the laggards.

“It’s about picking my names carefully—the ones I have confidence in that there’s not any lingering problems or some sort of impairment to the business model,” says Patrick Scholes, who covers cruises and lodging for Truist Securities.

He points to time-share companies, such as Wyndham Destinations (WYND), Hilton Grand Vacations (HGV), and Marriott Vacations Worldwide (VAC), as compelling picks because they’ll benefit from a strong demand for domestic leisure travel and a steady stream of fee income, among other things. Marriott’s shares are up about 3% this year, but the others are still underwater.

They all trade at less than 10 times enterprise value (mainly market capitalization, plus net debt) to consensus estimates for 2022 earnings before interest, taxes, depreciation, and amortization, or Ebitda. That compares with more than 16 times for traditional lodging companies like Marriott International (MAR) and Hilton Worldwide Holdings (HLT).


As for the surge in travel and leisure stocks, Scholes says: “It’s purely vaccine trade momentum here, because it’s not like hotel bookings and room rates are seeing any green shoots.” During the week ended Dec. 12, for example, revenue per available room, a key hotel industry metric known as revpar, was down 57% year over year.

Nevertheless, the backdrop for the hotel industry coming out of the pandemic, assuming the vaccines are successful and widely disseminated, is promising, says Bill Crow, head of real estate research at Raymond James. That’s partly because “we do expect hotel supply growth to slow over the next few years,” he tells Barron’s.

“That sets the stage for what should be a multiyear, fundamental upturn for the group right through 2024-25, assuming we don’t screw up the economy,” he adds.

Another potential catalyst that looks more within reach now is the return of business travel, on which many companies, including Marriott International and Hilton Worldwide, depend heavily. While Zoom meetings and other virtual tools have helped businesses get through the pandemic, there’s no substitute for making connections face to face during a conference’s coffee break or over a drink in the hotel bar.

Steve Reynolds, CEO of Tripbam Analytics, which helps companies monitor and book their travel, expects to “see a nice increase” in next year’s second-quarter business travel to about 40% of 2019 levels. He’s expecting the figure to hit 60% by the end of 2021—with international travel starting to pick up by then—and 80% in 2022.

“Everyone’s just itchy to get back to a conference or to a trade show,” Reynolds says. “They had value before. It’s all about networking in the hallway and bumping into people.”

Mark Finn, portfolio manager of the T. Rowe Price Value fund (TRVLX), spotted a few opportunities in April and May when he was aggressively buying shares of Hilton Worldwide and Marriott International. “As awful as the world seemed then, that was not really that hard to do,” he recalls.

More than a half-year later, Finn still holds Hilton and Marriott along with a smaller position in MGM Resorts International (MGM), which is more of a play on the beleaguered Las Vegas Strip. “They are good holdings, but they are not the fat pitches they were,” he says.

Meanwhile, the major U.S. cruise operators have been largely shut down since mid-March and have extended sailing suspensions into February or March as they look to address the conditional sailing order they received in October from the Centers for Disease Control and Prevention. “Right now, every one of my clients is sitting on hold,” says Jackie Ceren, who runs a travel agency in Largo, Fla., with an emphasis on cruises.

The companies say they are cautiously encouraged by booking trends, but they’re burning through hundreds of millions of dollars every month, and they aren’t expected to earn a profit until at least 2022—and a modest one, at that.

But stocks of the cruise operators, though still down at least 40% year to date, have surged on the vaccine news. “People have the ability and willingness and desire to go on a cruise post-Covid,” says Chris Woronka, a cruise and lodging analyst at Deutsche Bank. “That’s bullish. I just think the stocks have priced all of that optimism.”

Woronka, who remains bullish long term, thinks that expectations about the post-Covid reopening need to be tempered a bit. “It’s going to be a little more gradual of a recovery than we might think,” he says. “I have no idea when cruise lines or airlines or hotels are going to say you don’t have to wear a mask anywhere, but it’s not going to be when the first person gets the vaccine or the first 10% get vaccinated.”

An example of the valuation euphoria: Royal Caribbean Group (RCL) recently fetched more than 18 times its enterprise value to projected 2022 Ebitda, based on Woronka’s estimates. Its 10-year average for that metric is about nine times, he says.

       Photograph by Andrew B. Myers; (background) MediaProduction/Getty Images; (syringe) Dreamstime.com


Stepping back, Thomas Allen, a lodging, gaming, and cruise analyst at Morgan Stanley, says that Covid has created “some structural shifts in the industry,” with some sectors recovering more quickly than others.

Bearish on cruise stocks, Allen is more optimistic about leisure travel than corporate travel. And he favors gambling within leisure. “We don’t think Covid has created any meaningful structural headwinds to people’s willingness to go to casinos,” he says.

Indeed, a big winner during the pandemic so far has been regional gambling. Boyd Gaming (BYD), for example, is up 135% since Barron’s recommended it in May, and Penn National Gaming (PENN) is up more than 250% this year.

But the run-up means investors must be discerning. “Whether it’s cost cuts or whether it’s the pace of the recovery, there’s a lot of good news in these things,” says Deutsche Bank lodging and gambling analyst Carlo Santarelli.

Spread across the country in places like Biloxi, Miss., and Evansville, Ind., regional gambling properties typically serve customers who live within an hour’s drive and who focus on gambling—not entertainment, conventions, or events.

“Regional casinos have benefited tremendously from the fact that in a lot of states, they are the only game in town right now, with everything else closed,” Santarelli says. The regionals also benefit from the buzz about the growth potential of online sports betting and igaming, or online casino gambling, in which they’ve been investing. Caesars Entertainment (CZR), for example, is acquiring London-based sports-betting firm William Hill (WMH.UK).


Allen says he doesn’t “expect regional casino revenues to get back to 2019 peak levels until the second half of 2022 or 2023, but that is way faster than where we think Vegas or hotels will recover.”

Many lodging stocks have run up as well, though not as much as regional gaming shares. Allen says that, from an operational perspective, those lodging firms “with higher leisure exposure are better positioned than those with higher corporate exposure”—one example being Choice Hotels International (CHH).

Another example is Wyndham Hotels & Resorts, which gets about 70% of its business from leisure travelers and benefits from a lot of domestic drive-to business.

“The concern right now has been looking at that rising case load,” says Ballotti, the company CEO, referring to Covid. Still, he says he sees some encouraging signs for the hotel business: “People are feeling safer, especially to get in their car and drive someplace. They feel they can do it safely and responsibly.”

Barron’s spoke with a number of analysts and portfolio managers to find stocks with good potential value. Here they are:

Wyndham Hotels & Resorts

Compared with lodging companies such as Marriott International and Hilton Worldwide, Wyndham is more of a value play. It was recently trading at about 12.5 times enterprise value to estimated 2022 Ebitda, versus more than 16 times for Marriott and Hilton.

Wyndham, the world’s largest hotel franchising company, focuses on midscale and economy customers, segments of the market that have held up better than higher-end properties. As of Dec. 12, year-to-date revpar for economy hotels was down 20.9%, compared with the total in the corresponding 2019 period. Luxury revpar was down 57.6%.

Wyndham caters to “the business traveler that has to be out there on the road,” Ballotti tells Barron’s, adding that essential workers are key members of that group. “We saw a great pickup in the infrastructure business,” such as cable and utility workers. Health-care workers are another important constituency.

Robert Mollins of Gordon Haskett Research Advisors observed in a Dec. 16 note that Wyndham “is uniquely positioned to capture ‘drive to’ leisure” customers and “blue-collar business transient demand—telecom, front-line workers, infrastructure—all workers that can’t WFH,” or work from home. He has the stock at a Buy.

Unlike most leisure stocks, Wyndham continues to pay a quarterly dividend, cut to 8 cents a share from 32 cents this year. The company is looking to increase it in 2021. The stock, which yields 0.6%, has returned about minus 10% this year, though it has more than doubled off its March pandemic lows.

Norwegian Cruise Line Holdings

Cruise stocks, down more than 80% at one point during the initial Covid wave, have been volatile during the pandemic. And just when there will be sailing from U.S. ports again remains up in the air.

Still, Norwegian Cruise Line Holdings (NCLH), the smallest of the three major U.S. cruise operators, could be an interesting play whenever North American operations do resume in 2021.

“When we talk to the very large travel agencies, they tell us very clearly that the best booking/reservation demand for future cruises right now is on your higher-end, luxury cruises,” says Scholes, the Truist analyst. He has a Hold on Norwegian and peers Royal Caribbean Group and Carnival (CCL).

Roughly 15% of Norwegian’s fleet capacity is dedicated to luxury, much higher than it is for Royal Caribbean and Carnival, Scholes says.

Norwegian does have a lot of debt, including some taken on this year to stay afloat as its fleet sits idle. As of Sept. 30, its long-term debt totaled about $10.6 billion, up considerably from about $6 billion at the end of last year. And its recent valuation of 10.5 times enterprise value to estimated 2022 Ebitda is hardly cheap. Based on consensus FactSet estimates, the cruise operator isn’t expected to return to profitability until 2022.

But the company’s luxury brands, notably Oceania and Regent Seven Seas, operate fleets with smaller ships, in many cases with under 1,000 berths—a potentially more attractive option to customers in a post-Covid world who want to avoid larger crowds. Those vessels, says Scholes, are “less crowded and cramped than a mass market three-days-to-the-Bahamas trip.”

James Hardiman, a Wedbush analyst who rates Norwegian Outperform, observed in a recent note that the company “has positioned itself to eventually emerge from the pandemic and ultimately flourish.”

Caesars Entertainment

Caesars Entertainment’s shares have done well this year, up 26%, reflecting how strongly regional casinos have snapped back.

Although Caesars has several signature Las Vegas properties, including Caesars Palace Las Vegas, it derived about three-quarters of its third-quarter revenue from regional gambling operations. That gives Ceasars, which merged with Eldorado Resorts in an $8.6 billion deal in July, some protection as it waits for Las Vegas to recover.

Jefferies’ Katz says that the company’s Las Vegas business “is loyalty-driven, meaning that they don’t have the same large-scale events and conventions” that other gambling companies have. Conventions and events have been decimated by the pandemic, eroding Las Vegas traffic.

To broaden its reach, Caesars is acquiring William Hill, a sports-betting company with which it already had a partnership. “They put together the assets to be a major player in digital gaming,” says Katz. He has Caesars at a Buy.

The stock looks relatively inexpensive versus some of its peers. It was recently trading at 11.5 times enterprise value to estimated 2022 Ebitda, in line with its peer average and well below the 17.2 multiple for Penn National, according to J.P. Morgan Securities.

One thing to be aware of: Caesars does have a big debt load. As of Sept. 30, it totaled about $15.2 billion in long-term debt against total shareholders’ equity of $3.4 billion. But helped by the cash flow from its regional gaming properties, Caesars should be a solid bet, even after its recent run-up.

Marriott Vacations Worldwide

Trading recently at a little under 10 times enterprise value to consensus 2022 Ebitda, Marriott Vacations Worldwide sports a premium valuation among its peers in the time-share industry. But the company, whose shares have held up in a year in which many haven’t, looks worthy of that valuation.

The time-share business is helped by a lot of recurring fees and many customers who travel by car. Though sales have been pressured by the pandemic, they did show some improvement in the third quarter, compared with the total in the previous three months.

In a note after Marriott Vacations’ third-quarter earnings release in November, J.P. Morgan analyst Brandt Montour characterized the company “as a way to play a recovery in U.S. leisure travel.”

He cited the company’s “diversified footprint, with a majority of resorts drive-able, and linkage to a higher-end loyalty program” as attributes that “collectively positions [Marriott Vacations] uniquely among its time-share peers.” He rates the stock Overweight.

The company is expected to lose 46 cents a share this year, and then return to profitability in 2021 at around $5 a share, according to FactSet. As of Sept. 30, its liquidity, including $660 million of cash on its balance sheet, totaled more than $1.3 billion. Net debt was about $2.7 billion.

Marriot Vacations gets about 20% of its sales from Hawaii, which was shut down earlier in the pandemic, but which has reopened.

“You’ve really got nowhere to go but up,” says Truist’s Scholes. “And there’s a tremendous amount of pent-up demand for Hawaii.”

Extended Stay America

Extended Stay America (STAY), which caters to customers who need lodging for more than a week, has held up reasonably well during the pandemic. Its third-quarter revpar declined 14.7% from the level a year earlier. That’s a respectable result, considering that upscale and luxury hotels have seen revpar decline by more than 50%.

The stock isn’t garnering as much respect as those of some other lodging companies, however. Although well off of its pandemic-induced lows in March and April, Extended Stay America has returned about minus 4% this year, dividends included.

To preserve cash, the company did cut its quarterly dividend in May, to a penny a share from 23 cents a share. But this past week, it declared a special payout of 35 cents a share. The stock yields 0.3%.

Extended Stay America is expected to earn 24 cents a share this year—down from 95 cents last year—and 56 cents in 2021, according to FactSet. It was recently trading at about 10.5 times enterprise value to estimated 2022 Ebitda, a fair valuation compared with those of other lodging stocks like Hyatt Hotels (H) and Marriott International.

Extended Stay’s third-quarter results showed some encouraging signs, one being that its systemwide occupancy had been running close to 2019 levels in recent months.

The company has about 75% of its locations in suburban settings—as opposed to cities—and the majority of its guests arrive by car.

In a Dec. 17 research note, J.P. Morgan said it expects the company “to continue generating solid/above peer operating fundamentals” such as revpar and occupancy.

Wynn Resorts

Shares of Wynn Resorts (WYNN) are down about 18% this year, in part reflecting the company’s exposure to Las Vegas. Last year, it generated about a quarter of its $6.6 billion of operating revenue from Sin City. In addition, Wynn isn’t getting help from China’s Macau, where it gets the bulk of its revenue, due to Covid and restrictions from the Chinese government.

Still, Morgan Stanley’s Allen sees upside potential. Wynn’s customer base is higher-end and, he says, that will pay off when gambling rebounds in Las Vegas and other markets.

“That means you need fewer visitors to come back. It’s just that you need those visitors to spend more,” says Allen. “What we are seeing for the regional casinos that have reopened is that there are fewer visitors and people are spending a lot more.”

Wynn trades at about 13 times enterprise value to 2022 Ebtida estimates, a slight premium to rivals. Las Vegas Sands (LVS), which also has big exposure in Macau, was around 12 times, and MGM Resorts International (MGM), which is much more of a play on the Strip, was at about 10.2 times.

Still, Allen says, the company’s prospects are bright. He rates the stock Overweight, with a price target of $120, about 8% above where it traded recently. “The beauty of Wynn,” he says, “is that it somewhat takes the cream of the crop of the market, whenever the markets open.”

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