When 2020 started with China restricting travel into its Hubei province, the stock market dismissed the move’s impact on the world economy. And as the coronavirus unfolded in the region, markets thought that the problem would be strictly in China and the surrounding region.
By February, rising cases in Iran, South Korea and Japan led the airline industry to cancel more flights in Asia. By that extension, vacation stocks are getting punished as markets expect more disruptions for would-be travelers.
The latest coronavirus-triggered quarantine in Italy further reminds investors that the leisure and vacation market will worsen before it gets better. And in the United States, the media is reporting every new case, heightening fears.
The immediate impact of containing the virus will hurt the economy. People with cruise ship and airline travel plans are canceling them. Soon, government-imposed travel bans will hurt companies in the travel and leisure market.
There are seven vacation stocks investors should just leave alone for now.
Vacation Stocks: Carnival Corporation (CCL)
Carnival Corporation (NYSE:CCL) stock closed last week at levels not seen in almost a decade. Even the dividend that yields over 10% will not stop the panic selling. At these levels, the stock is highly attractive but may still not price in the total damage the coronavirus will have on the business.
Carnival stock trades at a price-earnings multiple in the mid-single digits. The market is pricing in more cruise cancellations ahead. But buying cruise ship stocks now may prove too early if more negative headlines scare away investors.
To Carnival’s benefit, the company has a debt-equity of just 0.5 times. Its short float, which is an indicator of bearishness, is at 4.9%. Before the virus outbreak, the company posted a steady revenue growth of 4.4% compounded annually (per Stock Rover). Net debt increased slightly in that time.
So, if customers cancel trips and a slowdown in bookings persists for months, investors should not buy CCL stock at this time.
Analysts have an average price target of $45.08. Wait for more downgrades before assuming the stock bottomed.
Royal Caribbean (RCL)
Royal Caribbean (NYSE:RCL), like Carnival, is valued at a single-digit P/E and pays a dividend that yields near 10%. Even for the value investor, looking only at the favorable valuations is not doing enough research. Besides, the company has a debt-equity ratio of 1, which is less favorable than that of Carnival stock.
On March 14, the company announced a global suspension of all its sailings. It said it plans to return to service on April 11.
Given that travel restrictions are tightening, Royal Caribbean may issue another downside guidance. Investors may even speculate the worst-case scenario in which the cruise ship operator forecasts a loss for the year. That would send the stock lower, if not prevent the stock from bouncing back. In either case, investors should avoid RCL stock for now.
Assume that revenue falls 15% this year and breaks-even in growth by fiscal year 2022. In a 5-year discounted cash flow model, Royal Caribbean stock has a fair value in the $45 range. Conversely, analysts have an average price target of over $115.
American Airlines (AAL)
American Airlines (NASDAQ:AAL) lost nearly half its value in the last month. Markets are pricing in the sharply declining demand levels. The firm waived fees and canceled many domestic flights. American Airlines CEO Doug Parker said that “Airlines should enable consumers to adjust their travel plans — regardless of when those decisions are made or when a passenger’s ticket was purchased.”
The company suspended flights to Milan, Italy through April 24. It stopped its operations to Seoul, South Korea, too. The growing number of flight cancellations will have a devastating blow to quarterly results.
The poor results may send the stock even lower as investors take a loss in the stock. Though the market has yet to price in peak fear, when it gets there, airline stocks may fall to new 52-week lows. Investors who are willing to hold AAL stock for 3-5 years may buy the stock as it falls. But for cautious investors unwilling to experience paper losses, now is not the time to buy.
Southwest Airlines (LUV)
Southwest Airlines (NYSE:LUV) did not drop quite as hard. The stock fell by less because it has a favorable credit rating and a debt-equity of 0.4 times. By comparison, its competitors like Ryanair Holdings (NASDAQ:RYAAY) has a debt-equity of 0.7 times as does JetBlue Airways (NASDAQ:JBLU), according to Stock Rover.
Even though Southwest Airlines may weather the downturn better than its competitors, posting an earnings loss in the quarter may put downward pressure on the stock. Furthermore, a prolonged downturn driven by preventing the coronavirus spread will discourage investors from buying LUV stock.
Before the slowdown in the industry, Southwest Airlines said that its 2020 growth expectations depended on the return of service of Boeing’s (NYSE:BA) 737 Max. Management will adjust its outlook after the airplane maker resumes the delivery of the aircraft.
In the last quarter, the airline benefited from a 7.1% drop in fuel prices year-over-year to $2.09 a gallon. Given the 10% daily decrease in oil prices in recent days, Southwest should benefit from lower operating costs. But falling demand is not a reason to buy LUV stock yet.
Analysts have an average price target of $51 on the stock.
Wynn Resorts (WYNN)
Wynn Resorts (NASDAQ:WYNN) is a developer of high-end hotels and casinos. Two weeks of closures for its Macau casinos will likely hurt quarterly results. But casino business is coming back in Macau. All of the patients in the gambling haven recovered from the coronavirus.
The company has plenty of liquidity, to the tune of $2.4 billion, in cash. That includes the $1.8 billion in Wynn Macau. The firm will likely weather the downturn over the next few weeks as business dries up. But waiting for the quarantine to end may take a toll on Wynn stock in the near term. When the shutdown in travel and restriction on large-group events ends, visitors may not return right away to hotels and casinos.
In the fourth quarter and before the coronavirus outbreak, Wynn already reported areas of weakness in the business. Its Las Vegas operations produced EBITDA of $80.1 million. Lower table games (such as Baccarat and domestic tables) cost $20 million in EBITDA. Wynn spent $49 million in projects at its Las Vegas location in the quarter. Even though the firm previously expected these investments to pay off this year, the worldwide concerns on the virus outbreak will delay such benefits.
Getting ahead of the curve of lower demand may pay off in the long term. But in the near term, investors will not care about the slimmer, simplified business structure. Expedia will save $300 million to $500 million in the future but the operating expenditure cuts are not without risks. If the customer service quality falls, its revenue growth may stall further, hurting overall results.
The valuation of Expedia stock is also unfavorable. At around 25 times earnings, investors are expecting the company to grow EPS by at least 20% annually. Digging into the details, the company may have a search engine optimization problem.
On its conference call, it said that “clearly as we move to direct relationships and direct traffic with our customers, that is the single best way we can offset any declines that come from SEO. In terms of what happened in the third quarter, I think it was a compounding of a number of tactical things that Google did and we did not respond well to.”
Analysts have an average price target of $134.05. The problem is that SEO uncertainties, lower travel demand and high valuations will limit the upside in Expedia stock.
Marriott International (MAR)
In the last month, trading volume in Marriott International (NASDAQ:MAR) surged at several times the daily average on the stock market. Investors rushed to sell their positions in the hotel giant. They are anticipating a big negative earnings revision. This expectation is obvious since cruise ship demand is fading and airline schedules are shrinking in North America and globally.
Despite already falling by over 25% in the last month, Marriott stock is still richly valued. Its P/E is pricing in EPS growth of nearly 10% over the next five years. Long-term investors may reasonably expect a loss in 2020 and part of 2021. So, the stock may fall further to price in such earnings declines. Eventually, occupancy rates will recover back to pre-coronavirus levels. The market just needs to look for a drop-off in infection numbers, first.
Guessing when the containment ends may lead to further losses for investors. Conservative investors should wait for countries to announce that the crisis is over before investing in this hotel firm.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. As of this writing, Chris did not hold a position in any of the aforementioned securities.