Thanks to the novel coronavirus, travel stocks have seen some of the worst performances in 2020.
According to Yardeni Research, hotel, resort and cruise line stocks in the S&P 500 have lost 55% year-to-date through April 17. Other hard-hit industries include casinos and gaming ( down 43% YTD), restaurants (down 10.2% YTD), apparel accessories & luxury goods ( down 46.5% YTD) and last, but not least, airlines, down 55.8%.
There’s no question travel-related companies have suffered more than their fair share from travel restrictions, stay-at-home orders and other coronavirus-related issues.
BNN Bloomberg recently published an article that showed many of the top travel stocks during the Great Recession recovered in the decade following the 2009 lows.
Consider that Royal Caribbean (NYSE:RCL) lost 86% of its value from the 2007 highs to the 2009 lows. However, in the following 10 years, RCL stock delivered a 1,906% return. Another spectacular performance came from United Airlines (NASDAQ:UAL), which fell 92% during the Great Recession but gained 2,046% in the decade that followed.
Here are the seven travel stocks I believe are good buys for the next decade or so.
- Royal Caribbean (NYSE:RCL)
- Southwest Air Lines (NYSE:LUV)
- LVMH (OTCMKTS:LVMUY)
- Estee Lauder (NYSE:EL)
- Hilton Hotels (NYSE:HLT)
- MGM Resorts International (NYSE:MGM)
- Booking Holdings (NASDAQ:BKNG)
Recent history shows that investors with the courage to bet on these beaten-down travel stocks are likely to win out in the end.
Travel Stocks to Buy: Royal Caribbean (RCL)
Of all the travel stocks on this list, Royal Caribbean CEO Richard Fain is one of the industry’s most experienced leaders. If anyone can get the battered cruise line through the latest recession, Fain’s the person to get it done.
As the intro stated, RCL stock delivered one of the best performances of the past decade. I have complete confidence that it will provide shareholders with a repeat performance. Come 2029, I expect today’s risk-takers to be rewarded generously. If you’re thinking of retiring in 10 years, I’d consider Royal Caribbean’s stock, but only if you’re in it for the long haul.
I recently discussed some of the reasons RCL would soon be trading above $100. I know it sounds crazy, but consumers will return to cruising. It’s just going to take some time.
Moody’s Analytics chief economist Mark Zandi discussed the effects of the coronavirus in March. While Zandi stated Covid-19 would hurt travel and tourism to a greater degree than 9/11, he did say business would ultimately come back.
“Global travel is effectively shutting down. It’s going to take a while to get it back up and running again. This is going to be a very tough year for the travel and tourism industry,” Zandi told USA Today in March.
No risk, no reward.
Do you think the investors who bought RCL stock below $6 in March 2009 weren’t a little apprehensive about their stock purchases? Of course, they were. Ten-baggers always require a leap of faith.
This is one of those times.
Southwest Airlines (LUV)
Southwest announced in a March 31 blog post that it would be offering its first cargo-only flights in its 48-year history. The cargo flights will be charters that carry only pilots and other necessary employees. That’s how bad the coronavirus is hurting the airline’s business.
It’s doing everything in its power to keep its business from going under.
Time to sell?
Not by a long shot. The Dallas-based airline is still Warren Buffett’s largest airline holding at $1.7 billion. It’s going to take a much bigger offloading of Southwest stock by the Oracle of Omaha to convince me it’s not a good buy.
In my most recent article about Southwest, I hedged by suggesting Berkshire stock was a safer way to bet on the airline coming out of its death spiral. While I still feel that way, I also said that once the economy is back on its feet, LUV stock becomes an excellent long-term bet.
If you’re a risk-taker, Southwest will recover from the current downturn in the airline industry. It’s well run and sticks to its knitting. That will go a long way once the world starts traveling again.
LUV is a long-term buy.
I’m about a month late recommending LVMH stock. However, it’s better late than never.
Most people familiar with the French luxury goods company know it because of brands such as Louis Vuitton handbags, Moet & Chandon champagne, Hennessy cognac, Christian Dior perfume and Tag Heuer watches.
However, the conglomerate has several brands that have been hurt by the coronavirus.
DFS, the world’s leading luxury travel retailer, is on that list. So is Starboard Cruise Services, which provides retail services on cruise ships, and the Belmond luxury travel brand, which includes hotels, trains, river cruises, safaris and other expensive travel experiences.
In November 2019, LVMH agreed to acquire Tiffany (NYSE:TIF) for $135 a share or $16.2 billion. Then the coronavirus hit and Tiffany’s shares sunk to $110. Rumors circulated that CEO and founder Bernard Arnault, the world’s third-richest person, was considering buying Tiffany shares on the open market below the agreed-upon price.
In March, LVMH issued a statement saying it’s not permitted to buy TIF shares. The issue went away. As I write this, Tiffany trades around $129.
In 2019, LVMH had revenue of 53.7 billion euros, 15% higher than a year earlier. On the bottom line, its profit for the year was 7.2 billion euros, 13% higher than in 2018. In terms of free cash flow, it grew 13% in 2019 to 6.2 billion euros.
All five of its operating segments had strong revenue growth this past year, led by 17% organic growth for its largest division, Fashion & Leather Goods, which accounts for 42% of its overall sales.
Buy below $70 and you’ll be thanking me in five years.
Estee Lauder (EL)
Year-to-date through April 20, Estee Lauder has lost 16.7%. That’s well below its three-year annualized total return of 26%. The world leader in the prestige beauty market, Estee Lauder’s business started to wobble long before the coronavirus hit.
In August 2019, Estee Lauder reported excellent fourth-quarter and full-year results. On the top line, the company grew sales by 9%, while on the bottom line, adjusted earnings in fiscal 2019 increased by a healthy 20%.
However, Estee Lauder’s outlook for fiscal 2020 called for sales growth of 6%-7%, significantly below its 2019 results. Four issues reflected its lower outlook: The makeup category would continue to suffer from softness in brick-and-mortar retail in both the U.S. and United Kingdom; costs associated with Brexit; trade tensions and tariffs; and, protests at major shopping areas in Hong Kong.
Nowhere in those risks was anything about a pandemic. Since Estee Lauder announced its fiscal 2019 results, EL stock has lost 22% of its value. That compares to 5% for the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
Travel retail has become a significant growth driver for Estee Lauder. In 2009, travel retail accounted for approximately 7% of its overall sales. In 2018, it hit 18% of the company’s sales. The company points out that more than one billion travelers pass through airports each year, with that number expected to grow by 5% annually for the foreseeable future.
On April 15, Estee Lauder updated investors on initiatives it is taking to deal with the coronavirus.
These include suspending its quarterly dividend and share repurchases, issuing $700 million in 2.6% senior unsecured notes due in 2030, borrowed the full amount of its $1.5 billion revolver, cut salaries of senior executives and increased its cost control measures to find additional cash during this crisis.
With few people flying, Estee Lauder’s travel retail will suffer over the next few months. The good news is that a big chunk of its travel retail business is in emerging Asian markets, which are well ahead of North America in dealing with Covid-19.
The last time the company’s stock dropped so precipitously was in the Great Recession. A buying opportunity like this doesn’t come around very often. Don’t miss it.
Hilton Hotels (HLT)
The American Hotel & Lodging Association estimates that the U.S. hotel industry is losing approximately $500 million in room revenue per day. That’s putting all the major hotel chains in a severe bind.
Like most travel-related companies, Hilton Hotels is not immune from Covid-19. It will get hit just like everyone else. However, it might be better positioned to keep the wolf from the door.
“Based on taking a look at the balance sheets, the leverage of some of the major brands at this point, I think Hilton is the most well capitalized to make it through and weather the storm,” Deborah Friedland, Hospitality Practice Lead at accounting firm EisnerAmper, told Yahoo! Finance April 8.
On March 11, Hilton said it would draw down a portion of its $1.75 billion revolving credit facility to fight the coronavirus. It has approximately $1.5 billion still available. It had $538 million in cash on its balance sheet at the end of December. That gives it more than $2 billion to work with.
As for its debt, it had a little under $8 billion at the end of December, compared to assets of $15.4 billion.
As part of its belt-tightening, CEO Christopher Nassetta won’t take any salary for the remainder of 2020 and its executive committee will take 50% pay cuts for the duration of the crisis. It is suspending all dividends other than the ones already declared, pausing its share repurchases, and eliminating all essential expenses.
In the past three years, Hilton annually repurchased an average of $1.4 billion of its stock.
Because of its asset-light business model, Hilton was able to generate free cash flow of $1.4 billion in 2019, an FCF margin of 14.6%, which is exceptionally healthy.
Of course, we know that revenues, profits, and cash flow are going to suffer over the next few months. However, HLT stock is trading at levels it hasn’t seen since September 2017.
While its share price may fall further, in 18-24 months it ought to be trading above $100.
MGM Resorts International (MGM)
Of the names on this list, MGM Resorts is one of the more speculative bets with a year-to-date total loss of 57% through April 20. You have to go back to its 10-year annualized total return to get a positive result, a measly 1% compared to 10.7% for the Morningstar U.S. Market Index.
At the end of March, MGM addressed the financial impact of Covid-19. Acting CEO Bill Hornbuckle told investors that its domestic operations had $3.9 billion in operating cash and cash balances, including $1.5 billion drawn on its revolving credit facility.
Thanks to the sale of the real estate on which the Bellagio, MGM Grand and Mandalay Bay operate, MGM reduced its debt by $3.9 billion over the past two quarters. It now has no debt maturing before 2022. Of the $5.5 billion in debt left after the sales, MGM has $200 million in interest payments for the rest of 2020.
It ought to have plenty to survive this recession.
Also, it has some excellent assets beyond its casino and resort operations. These include its 50% interest in CityCenter, the largest privately funded development in U.S. history, 56% of MGM China, MGM Springfield in Massachusetts and a 61% economic interest in MGM Growth Properties (NYSE:MGP).
In the first two months of the year, excluding its $1.5 billion pre-tax gain from the sale of the MGM Grand and Mandalay Bay, the company’s net income was approximately $140 million (based on a 22% effective tax rate), about seven times the profit a year earlier. And that was despite a 10% decline in revenues from weaker visits at its Macau properties.
Trading at less than half its five-year price-to-cash-flow multiple, you’re betting that the remaining assets it has will be worth a lot more over the long haul. MGM stock is only for aggressive investors.
Booking Holdings (BKNG)
The good news about Covid-19 is that Booking Holdings was in a financially sound position at the end of 2019, before the outbreak. It had $7.3 billion in cash and marketable securities on its balance sheet, $8.7 billion in debt and $21.4 billion in total assets.
In addition, it has a $2 billion revolving credit facility with nothing drawn on it. Further, it recently raised $1.75 billion in senior convertible notes due in 2025 and 2027, respectively.
So, it’s got significant financial resources to tide it over.
The bad news is that it carries $2.1 billion in goodwill for its Kayak and OpenTable units. Booking is most likely going to take a significant impairment charge for the quarter ended March 31, 2020. Furthermore, its revenues in the second quarter will be significantly lower than in the first quarter. At the time, the virus was primarily contained in Asia.
In the second quarter of 2019, Booking’s sales were $3.9 billion. The company has yet to publish its Q1 2020 results. However, in Q1 2019, it had revenues of $2.8 billion. I would expect its Q1 2020 results to be flat and its second-quarter results significantly lower than in the same period a year ago.
The company has admitted that its business will be severely impacted for the next few months and beyond that, once the virus has run its course and the economy is in recovery mode.
Over the past three years, Booking has averaged an annual free cash flow of $4.6 billion. Let’s assume that this year’s FCF is cut by 75%. It would still have more than $1 billion in free cash flow against a current enterprise value of $62.2 billion.
Like MGM, it’s trading at a significant discount to its five-year price-to-cash-flow. Were it to drop into single digits (it’s currently 12.7x), it too becomes a very attractive buy for aggressive investors.
Again, if you’re using retirement funds to buy these travel stocks, I’d probably look to something less speculative.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.