Paid vacations
Pack your portfolio with these travel-sector stocks
By William Spain, MarketWatch
CHICAGO (MarketWatch) -- As Americans hit the road in larger numbers this summer after a couple of grim years, some companies that cater to the leisure traveler look particularly scenic. So pack the kids and the sunscreen in the car -- and some of these stocks in your portfolio.
Among the factors contributing to the anticipated increase in travel are relatively low gas prices, an apparent stabilization in the unemployment rate (people without jobs, or those worried about losing them are far less likely to go on vacation) and pent-up demand.
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Scott McCartney reviews three online travel tools -- TripIt, WorldMate and TripCase -- that help organize your trip as well as make changes on the road using your smartphone.
The Travel Industry Association is expecting a 2.3% increase in leisure travel this summer, according to Suzanne Cook, senior vice president of research for the U.S. Travel Association, an industry trade group.
"We are more optimistic now than we have been for some time," she said. "We expect Americans to travel a bit more frequently and spend a bit more money this year. And that is good news for an industry that has had to cut their fares and rates significantly to stimulate whatever demand they could."
Roadside attractions
One prime beneficiary is likely to be the hotel and resort industry, which suffered one of the worst slumps in memory during the downturn as occupancy levels and average daily rates went into a tailspin. The big lodging chains are already seeing some signs of a turnaround and are getting ever more bullish on their prospects by the day.
The key here, along with occupancy levels, is any upward movement in revenue per available room -- a benchmark industry metric known as RevPAR. After a downward spiral that began in 2008, this gauge is starting to recover at many chains and is probably the best indicator of bottom line improvement for these companies.
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Just this week, in what could be a good harbinger for the summer season, Marriott International Inc. (NYSE:MAR) said that its RevPAR rose about 9% at its North American properties in May while it posted its first room rate increase in almost two years. But investors are still being relatively cautious: after a big run-up earlier this year, shares of Marriott and many other lodging stocks came down to earth with the rest of the markets and are trading at levels some would describe as cheap.
"With the recent market related swoon in the lodging stocks, the stocks are discounting a lot of negative shocks from Europe and reduced room demand growth, and are being set up for a nice move," said Joe Greff, an analyst with J.P. Morgan. "We like Marriott, Starwood (NYSE:HOT) and Wyndham (NYSE:WYN) . [Those] are our top picks [with] valuations now below long-term averages."
Intercontinental Hotels Group (NYSE:IHG) , with a diverse portfolio that ranges from five-star urban palaces to modest roadside Holiday Inns, might also be worth a look as it is uniquely poised to benefit from any and all increase in demand, whether it be from free-spenders, penny-pinchers or both.
And should a mini-boom truly materialize, hotel operators are poised to reap higher margins and thus, profits, than they might have in the past due to cost-cutting programs that were implemented in the worst of times but which may still be around in the best.
"They are doing more with less from a staffing perspective," noted Brad Garner, a vice-president at STR Global. "It certainly would make them more profitable."
The travel research firm expects revenue per available room to rise 3% this year to $55.13 and sees occupancy levels at 55.8%. By the end of next year, the firm predicts, revenue per available room could be at $58.70 with occupancy levels climbing to 58.1%
A "lot of Americans believe the family vacation is a birthright" and almost regardless of their economic circumstances, "they will be out there," Garner said.
Travelers on the road get hungry, of course, and that favors fast-food operators including McDonald's Corp. (NYSE:MCD) , Starbucks Corp. (NASDAQ:SBUX) and Yum! Brands Inc. (NYSE:YUM) .
For a broad handle on these and other roadside attractions, consider a leisure-sector mutual fund or exchange-traded fund.
For example, both Fidelity Select Leisure Fund (NASDAQ:FDLSX) and exchange-traded fund PowerShares Dynamic Leisure and Entertainment (CONSOLIDATED:PEJ) recently held sizeable stakes in McDonalds, Starbucks and Yum! Brands. The two offerings also own shares of restaurant chains Chipolte Mexican Grill Inc. (NYSE:CMG) , Darden Restaurants Inc. (NYSE:DRI) and Papa John's International Inc. (NASDAQ:PZZA)
Up and away
Those who don't drive are most likely to take to the air. And they already have started, with the number of people flying on U.S. airlines in March up 2.4% to 62.4 million from 60.8 million in the same month of 2009, according to the latest data from the U.S. Bureau of Transportation Statistics. That is well below the 2008 peak of 67.5 million, but still tops the 60 million in March 2004 when the industry had finally recovered from the aftermath of Sept. 11, 2001.
Earlier this week, Moody's Investors Service revised its outlook for the airline industry to stable from negative as it expects to see some growth in passenger volumes this year and next while capacity cuts have boosted load factors, an important gauge of a carrier's health.
"We expect profitability in the global airline sector to improve as we gain distance from the 2009 trough of the recession," said Jonathan Root, Moody's airline analyst. "While a contraction of consumer confidence and still-high unemployment remain risks that could temper improvements in yields, the airlines' careful capacity management, if maintained, should be effective in mitigating these risks."
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Still, many of the big legacy carriers are burdened by massive debts and high fixed operating expenses even as they are forced to continually cut fares to fill seats. A good pick in this sector is, as always, Southwest Airlines (NYSE:LUV) .
The profitable carrier has been taking advantage of its rivals' collective woes, expanding into high-traffic hubs like Boston's Logan and New York's LaGuardia airports in the past year. Its shares, while double a nadir of $6 and change last summer, have fallen off from its $14 high of April and trade at around $12.
To spread investment risk among many airlines, consider Claymore/NYSE Arca Airline ETF (CONSOLIDATED:FAA) , an exchange-traded fund that holds shares of U.S. and international carriers. ETFs track a benchmark index but trade like stocks. Almost half of this 24-stock portfolio is given to three companies: Southwest, Continental Airlines Inc. (NYSE:CAL) and Delta Air Lines Inc. (NYSE:DAL) .
For wide exposure to the airline and aircraft business, Fidelity Select Air Transportation Fund (NASDAQ:FSAIX) counts air-freight companies including FedEx Corp. (NYSE:FDX) and aerospace firms such as Boeing Co. (NYSE:BA) among its holdings.
Good old summertime
Increases in air traffic also mean higher demand for car rentals, apt to be good news for industry leader Hertz Global Holdings Inc. (NYSE:HTZ) , which has already posted a revenue increase in its first quarter and is positioned to take an even bigger share of the market with its contentious bid to acquire Dollar Thrifty. The stock, currently in the $10 range, is midway between its 52-week high and low points. Avis Budget (NYSE:CAR) would be a possible No. 2 pick, although its numbers have been slower to recover so far.
Another way to capitalize on people's summer travel plans is with amusement parks. While Six Flags Entertainment might seem an obvious choice, the company only recently emerged from bankruptcy and has yet to be relisted. Besides, with capital spending constrained, it has had little chance to upgrade its facilities or add new attractions that might encourage repeat business.
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Cedar Fair LP (NYSE:FUN) , on the other hand, has been expanding and has long been the more successful, albeit smaller, of the two big operators.
At the time of its first quarter earnings release last month, Cedar Fair said that it was "encouraged by the initial, positive trends in attendance, season ticket sales and group sales at the parks that are already open" and it is "hopeful that the weather and overall economy will allow these early trends to be sustained over the course of the season."
Currently priced at about $13, the stock is off a 52-week high of $16 and so still has room to move -- especially if those trends hold and are reflected in its next earnings report, due out this summer.
One major challenge for the sector, apart from a dip back into deep recession or an unforeseen "Black Swan" event, will be whether it can leverage an increased appetite for travel into higher prices for its products. After several years of bargains, travelers may balk if the prices of their seats, rooms, cars or admissions suddenly start to jump.
"Last year was so tough, it conditioned consumers to expect discounts," noted STR Global's Garner. "They are going to be traveling but they won't reach deep into their wallets."
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