Summer is upon us, meaning we should see an uptick in leisure travel. Whether people are looking to spend some time at the beach or hit a popular tourist trap, this is a big season for companies that accommodate those desires.
Which stocks stand to benefit? The travel universe is so vast and the value chain fragmented. Do you play the online travel agencies (OTAs), or the deal companies, or the all-in resorts?
Here are three stocks to buy — one player in search and discovery, one cruiseliner and one OTA — to play the summer travel bump.
In no particular order…
Summer Travel Stocks to Buy: Tripadvisor (TRIP)
Tripadvisor Inc (NASDAQ:TRIP) has had to put on a brave face in light of year-to-date performance of -21% heading into the summer travel season and trailing-12-month performance of -44%. At current valuations, I can get comfortable with some of the overhangs on the stock and believe it presents a buying opportunity whereby the stock is de-risked.
We all know that the global travel market is worth big bucks — $1.3 trillion is what TRIP uses. And within this market, TRIP stock has a unique and powerful model. More than 390 million average monthly unique visitors and 435 million reviews and opinions. Based on a Tripbarometer survey, Tripadvisor is “the world’s most popular travel site.” And 55% of respondents use TRIP to decide on accommodation. It’s not a stretch to consider their content and user engagement a moat.
But the rub is that not everyone uses TRIP to book tickets or hotel rooms, so “leakage” occurs. Peers like the traditional OTAs monetize more effectively on a per visitor basis. TRIP’s Instant Booking feature is meant to address this. It has been a work in progress since 2014, but progress is being made. Directionally, things look on track with U.S. click-based and transaction revenue per hotel shopper trending positively for the last two quarters.
The other major overhang is the TV brand campaign. Total spend is not set in stone, but it probably won’t be less than $50 million if TRIP is serious about competing with the likes of Trivago, which spends nearly all revenues on advertising. Frankly, I think management will end up spending more than that, and since there is no guaranteed return (high or low) on this, the market seems to think this is good money down the drain.
TRIP is doing what it feels is necessary to compete in a very intense environment. It keeps getting outspent by peers, so this is one way to try to go toe-to-toe. And even if it doesn’t pay off in a huge way, the current share price provides some insulation.
Summer Travel Stocks to Buy: Norwegian Cruise Line (NCLH)
Last week, Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH) debuted the Norwegian Joy, marking its long-awaited foray into the Chinese market. The Norwegian Joy, designed in Germany, is tailored specifically for the Chinese consumer. Competitors like Carnival Corp (NYSE:CCL) and Royal Caribbean Cruises Ltd (NYSE:RCL) were first-movers, while NCLH has waited despite seeing the same massive potential.
China is the name of the long-term game in the out-of-favor cruise industry, which is why success here is crucial. CCL and RCL have been in China longer, but ROICs have remained lackluster, only recently trending back towards higher single-digits/low double-digits. NCLH has opted for a sit-and-learn approach, methodically tinkering its ship to meet mainland Chinese preferences.
As a result of its more methodical approach, NCLH is better primed to make a strong first impression and promote its brand as summer travel ramps up. Linking up with Alibaba Group Holding Ltd (NYSE:BABA) on the preview cruise was a smart move as well, indicative of excellent strategic maneuvering relative to peers. As China takes off and new lines are added, NCLH will also be able to better diversify revenue from North America.
With the addition of the Joy, NCLH has a combined fleet of 25 ships with approximately 50,400 berths and an overall more upmarket product, which is beneficial from a pricing standpoint. Next year the Breakaway Plus 3 is scheduled and the Breakaway Plus 4 the following year, providing a clear pipeline of new capacity in the near term. Barring a deep global recession, viral/disease outbreaks, or other exogenous events, new capacity and the refurbishment program will position NCLH to drive shareholder value.
Summer Travel Stocks to Buy: Ctrip.Com (CTRP)
With Qunar and eLong now private — the latter after Ctrip.Com International Ltd (ADR) (NASDAQ:CTRP) acquired a 38% stake in May 2015 — the already small universe of Chinese OTAs listed on U.S. exchanges has narrowed to pretty much just CTRIP. It would have been my pick anyway, given scale and accretive M&A, which are key value drivers in the OTA business.
One main metric to keep an eye on is mobile app downloads. Mobile is the primary device through which Chinese consumers make bookings (both hotel and transportation). Cumulative downloads for the mobile app grew from 1.7 billion as of year-end 2015 to 2.9 billion as of year-end 2016. Based on numbers alone, the number of non-Chinese users are over a billion.
I wouldn’t want to confuse downloads and active users, but in CTRP’s case, the motive for download is functionality. I can imagine a small portion of downloaders downloading the app just to look at train times, for example, but given ease of booking and reliability, CTRP very much is the go-to domestically for the final transaction. Though the company doesn’t disclose download-to-transaction-completion conversation rates, I would imagine them to be high.
Another value driver for Ctrip is the investments in other travel companies. Take its $180 million investment last year in India’s largest online travel company, MakeMyTrip Limited (NASDAQ:MMYT). Also last year, CTRP completed its acquisition of Skyscanner, a U.K.-based travel search site. These are smart moves that diversify revenue streams and geographic exposure.
As CTRP continues to dominate in the Chinese OTA market and expand into adjacent categories via acquisition at home and abroad, shareholders will benefit during the summer travel season.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.