As we head toward Memorial Day weekend, summer travel plans
are being discussed around many kitchen tables.
Americans are hitting the road again, packing hotels in major
cities as some national parks brace for a record number of
visitors. Many conversations in foreign languageswill be heard in
these places as well, as international tourists are trekking to
the United States in record numbers.
Travel and tourism is a rare brightspot in a low-growtheconomy
. According to the Bureau of Economic Analysis, spending on
lodging rose 9.4% in the fourth quarter of 2012 compared with
And it's not just consumers who are hitting the road: Spending
by business travelers is expected to rise 5% this year to $268
billion, according to the Global Business Travel Association.
For investors, the ability toprofit from the resurgent travel
and tourism sector can be a bit tricky.
Popularstocks such as
trade near all-time highs, already reflecting the bright outlook
in place. Looking purely at Disney's price-to-earnings/growth
(PEG ) ratio, thestock looks fairly valued. For example, profits
are projected to grow 11% to 12% in both fiscal 2013 and 2014,
whileshares are trading for around 15 to 16 times projected 2014
It's always best to find stocks that sportearnings growth
higher than the price-to-earnings (P/E ) ratio. That doesn't make
Disney a badinvestment . It's just that you should focus on
long-term priceappreciation potential and not on near-termgains
Yet there are some clear values if you are willing to dig a
little deeper into this sector. Here are a few to consider.
Six Flags Entertainment (
: Although shares of this amusement park operator have also
performed quite well, the 5%dividend yield is among the best in
the sector. This is a company more focused on generating profits
than growth, as few amusement parks are opened in any given year.
Still, rising consumer spending is a clearcatalyst .
"We have successfully executed price increases across our
parks and are still seeing very strong season-passsales growth
coming into the season," said Jim Reid-Anderson, chairman,
president andCEO of Six Flags.
Thatpricing power is translating into impressivefree cash flow
, fueling stock buybacks and that soliddividend . Six Flags
currently has another $114 million in planned spending on a
current buyback plan, and Goldman Sachsanalysts say they "would
not be surprised if they announce a new authorization" after the
current one is completed.
Is this dividend safe? Well, Goldman expects free cash flow to
rise from $270 million in 2013 to $310 million in 2014 and 2015.
Keeping thepayout ratio constant, this dividend might rise
another 10% to 20% in the next year or two, especially after
stock buyback programs are completed.
Full Hotels = Higher Prices
The U.S. lodging industry is also feeling the effects of rising
travel spending. Analystsnote thatrevenue per available room is
trending 8% higher this year than in the comparable period a year
earlier. That's the result of a more muted pace of construction
activity during the past half-decade, which has kept supply tight
in many markets (as anyone traveling to New York City can
Still, it's wise to focus on hotels that aren't too exposed to
somewhat weaker lodging markets outside the United States.
"We reiterate our year longcall of preferring U.S. exposed
hotel companies vs. global companies as U.S. trends continue to
outperform," Merrill Lynch analysts said. They think that some
industry operators such as
Starwood Hotels & Resorts (
are seeing their results dampened by poorly performing
Marriott International (
, "given its 75% U.S. exposure and best-in-classcash flow that is
driving a significantreturn of capital ," and
Host Hotels (
, as it appears to be the value play in the sector. Each of
Host's rooms is valued at $270,000 (market value divided by the
number of rooms), compared with an industry average of $330,000.
That leads Merrill's analysts to suggest that Host Hotels would
beprime buyout fodder in a rapidly consolidating industry.
Airline Stocks Get a Tailwind
Although airline stocks have posted solid gains in recentquarters
, more gains may still lie ahead.
Not only are airline carriers continuing to show great
discipline when it comes to capacity, but the recent drop in
crude oil prices should help these carriers to post lower jet
fuel costs in 2013.
Still, it's fair to wonder what kind of value these stocks
have after such strong gains. In the past few years, I have
repeatedly noted that airline stocks P/E and cash flowmultiples
were absurdly low, reflecting too many fears of an industry
reversion back tobankruptcies and losses.
Do these carriers still sport low multiples? For the most
JetBlue (Nasdaq: JBLU)
don't appear to be compelling bargains, but the rest of the pack
U.S. Airways (LCC)
is an intriguing opportunity, as its pendingmerger with
could lead to major synergies, as was the case with
Delta 's (DAL)
merger with Northwest and
merger with Continental. It will be several quarters before
analysts understand the profit gains that canaccrue from the U.S.
Airways deal, but history shows those gains could be pretty
About a month ago, I spelled out why Delta remains my favorite
sector play. I still hold that view. Delta's cash flow is
impressive, and its management team has proved to be savvy. This
stock could easily end up in the mid-$20s before the next
economic cyclical peak.
Risks to Consider:
These companies depend on foreign tourists to an extent, and
though global tourism is rising, both Europe and China continue
to show signs of economic weakness. If those economies worsen,
then tourism spending will be affected.
Action to Take -->
Although share prices for many travel and leisure stocks have
moved higher from their early 2009 lows, the broadermacro
environment suggests that more gains lie ahead. Spending on
travel by consumers and businesses is growing at a fast pace, and
if the broader economy manages to strengthen in 2014 and 2015 as
manyeconomists expect, then this sector's growth prospects should
remain quite robust into the middle of the decade.