There’s a long-term case for travel stocks even as the novel coronavirus continues to spread. At some point, even if it’s years off, normalcy will return to everyday life. Whether a company like Moderna (NASDAQ:MRNA) develops a vaccine, treatments improve, or natural factors intervene, this pandemic fortunately won’t last forever. And with many travel stocks down 50% or more, there are intriguing plays on that long-term thesis.
The math is reasonably simple: if those travel stocks can return to past levels, that suggests at least 100% appreciation. Even if that process takes several years, returns still should be attractive.
The problem with the group is that while the math is simple, the case isn’t necessarily so. The industry has taken a huge short-term hit. Losses almost certainly total in the tens of billions of dollars. With coronavirus cases surging nationwide, those losses may be even larger than feared, a key reason why many travel stocks have weakened of late. And for companies who held significant debt before the pandemic, new borrowings add to both interest expense and risk going forward.
Again, there’s a case for travel stocks on the whole. But there’s not necessarily a case for every stock in the sector. For these four stocks in particular, short- and long-term challenges suggest caution, even after major sell-offs:
- Carnival (NYSE:CCL,NYSE:CUK)
- American Airlines (NASDAQ:AAL)
- Sabre (NASDAQ:SABR)
- Expedia (NASDAQ:EXPE)
4 Travel Stocks to Avoid: Carnival
Carnival is one of the biggest victims of the pandemic. Sailings have been shut down for months, and the Centers for Disease Control and Prevention recently extended its no-sail order through Sept. 30. The costs to rescuing stranded travelers and employees were extensive. Even in the second half, the company expects to burn roughly $4 billion in cash, according to commentary from this month’s earnings release.
As a result, CCL stock has plunged nearly 73% so far this year. Of course, that decline in turn makes the stock intriguing to long-term value investors. Surely, at some point, cruisers will return. Carnival may be a smaller company, but if it can successfully match supply to demand it should be able to return to profitability as soon as 2021.
But I’m skeptical about the bull case here. As our Matt McCall detailed last week, incremental interest expense thanks to new 2020 borrowings alone should total in the range of $1 billion. And there’s a real concern that the industry is transformed permanently.
Even if Carnival does return to profitability at some point, those profits may not be enough to support a market capitalization still above $10 billion. And if demand isn’t quick to rebound, the leveraged balance sheet creates real solvency risk. From here, CCL stock looks cheap for very good reason.
The problems for the airline industry are somewhat similar. Debt is a significant concern here. So are near-term losses.
As with cruise companies, there’s a real concern that the pandemic will depress demand permanently. The rapid adoption of videoconferencing solutions from Zoom Video Communications (NASDAQ:ZM) and Microsoft (NASDAQ:MSFT) could limit the need for business travel. It’s those customers who drive consistent demand, and who often are less price-sensitive (and thus more profitable).
After all, even by the standards of the sector, American looks particularly risky. It has the most debt of any U.S. major airline. Management is a concern. Chairman and chief executive officer Doug Parker both leads the company and the board of directors that chose to buy back stock in recent years instead of paying down debt. That’s likely because Parker infamously said in 2017 that “I don’t think we’re ever going to lose money again.”
That overconfidence — which is foolish in light of the industry’s history of destroying capital — led to a series of disastrous decisions. And it makes it difficult to have much faith in Parker to lead American through its most challenging time since September 2001. With better options in the sector, notably Southwest Airlines (NYSE:LUV), even airline bulls should look beyond AAL stock.
Investors looking for travel stocks to buy could look for suppliers as well. And Sabre would be an interesting choice.
Sabre’s GDS (Global Distribution System) helps power the airline industry, along with rivals Amadeus (OTCMKTS:AMADY) and privately held Travelport. Its reach extends to hotels and rental cars as well, perhaps providing some protection from continued pressure on air traffic. Meanwhile, Sabre has slashed costs in recent months, while an asset-light model avoids some of the problems faced by the likes of airlines and rental car operators.
But there are too many concerns here to get bullish, even with SABR down about two-thirds this year. Here, too, debt is an issue. And there will be long-term consequences. Airlines, in particular, already were trying to get away from GDS bookings.
Meanwhile, Sabre was in the middle of a multi-year turnaround, including an overhaul of its entire technology stack. That turnaround will be paused for some time.
Along with other travel stocks, SABR has faded in recent weeks. Barring an uptick in the sector, there are stumbling blocks to a significant rally from here.
Both Expedia and Sabre share a common problem: performance even before the pandemic wasn’t all that great. Both stocks had traded sideways for years, in part because of frustrated customers.
For Expedia, hotels in particular were trying to drive direct bookings, precluding the fees paid to online travel agencies. In dire times, those efforts, and those savings, will be even more important.
To be fair, Expedia’s customer base and entrenched position mean it may find a way to resume growth once normalcy returns. But it also seems like investors have a simpler choice elsewhere. EXPE stock is down 22% this year; larger rival Booking Holdings (NASDAQ:BKNG) is off 17%.
At a modestly smaller discount, I’d rather own BKNG than EXPE. Booking Holdings is larger, has been growing faster, and at least relative to 2021 Wall Street estimates, its stock is cheaper. It’s certainly possible Expedia stock finds a rally — but if it does, other travel stocks, and likely BKNG, almost certainly do the same.
Vince Martin has covered the financial industry for close to a decade. He has no positions in any securities mentioned.