Is it a good time to invest in hotel and airline stocks, two of the hardest hit sectors? Will this low water mark in these stocks see the return of the road warrior?
As Microsoft co-founder Bill Gates touted not long ago, business travel will be permanently reduced by 50 per cent. (For good measure, Mr. Gates added that more than “30 per cent of days in the office will go away.) But not everyone shares Mr. Gates’ outlook. “Business travel is definitely down and we are unlikely to see an upturn until 2022,” says Scott Kirby, the CEO of United Airlines. “We aren’t through the end of the tunnel but we clearly are seeing the light at the end of the tunnel.”
Organizations, families and individuals have postponed or cancelled travel as a result of COVID-19. But, as CIBC points out, Canadian consumers and businesses have amassed $170 billion in cash savings, and many people will look to travel as one of their first activities post COVID-19.
Hotels and airlines have definitely suffered, as Microsoft Teams, Zoom Cloud Meetings and imminent health danger have led to the cancellation of in-person meetings and conferences. Though there are some signs of a return to close-to-normalcy, if not a resurgence. Hilton CEO Christopher Nassetta says business travel is “lagging but it’s coming back”. And a survey of business travellers by insurance company Chubb revealed that 54 per cent were OK with domestic flying and 52 per cent were comfortable with staying in a hotel.
The BIG question is this: Is it a good time to invest in hotel and airline stocks, two of the hardest hit sectors? Will this low water mark in these stocks see the return of the road warrior? Says one analyst: “Business travel is slowly creeping back up, but it’s not going to return to pre-pandemic levels until 2024. We’re already seeing a lot of pent up consumer demand released in the form of increased vacations and reservations.” Adds another analyst: “It’s hard to say if this is a bottom. Another violent variant can stop the recovery in its tracks. But I see the small signs as signs of a recovery. Depending on your opinion of certain stocks, I’d be buying at these levels.”
Herewith a small, random sampling of selected airline and hotel stocks.
Delta Airlines, Inc. (NYSE—DAL)
One of the leading US air carriers, Atlanta-based Delta does not face any serious internal obstacles to a pre-pandemic recovery. Nineteen Wall Street analysts have issued ratings and price targets for Delta in the last 12 months, offering price forecasts with a median target of US$54.00, with a high estimate of US$72.00 and a low estimate of US$33.00. The median estimate represents a 13.26 per cent increase from a recent price of US$47.68. Buy.
American Airlines Group Inc. (NASDAQ—AAL)
American is the largest US carrier by capacity. Bulls like the fact that it has the youngest fleet among US major airlines, which should dampen fuel expense and maintenance; that it has largely completed its fleet renewal, which should decrease its capital expenditures; and the fact that leisure travellers are becoming more comfortable flying during the pandemic. Bears cite the fact that passenger air traffic is likely to be severely depressed until a COVID-19 vaccine is widely distributed. Also, American has substantial financial leverage and faces an uncertain demand environment. And, business travel recovery tends to lag economic recovery and American has high business travel exposure. Hold.
Air Canada (TSX—AC)
Canada’s largest airline sees analysts predicting a price target of C$33.00. According to one analyst, the airline is “. . . positioned to come out of the pandemic as a stronger airline despite uncertainty facing the recovery path for corporate travel. We see Air Canada capable of getting back to pre-pandemic profitability before traffic returns to 2019 levels.” Bulls like the fact that Air Canada entered the pandemic with less leverage and more liquidity than many US-based peers. As well, the airline has brought back its frequent flyer program, which should improve the airline’s business, and, as with other airlines, travellers are becoming more comfortable flying. But like other airlines too, passenger traffic is likely to be down until a COVID-19 vaccine is widely distributed. The airline depends considerably on international travel, which is likely to come back only slowly. Buy.
Intercontinental Hotels Group PLC (NYSE—IHG; LON—IHG)
InterContinental Hotels Group owns, manages, franchises, and leases hotels in the Americas, Europe, Asia, the Middle East, Africa and China. As of December 31, 2020, the company had approximately 5,964 hotels and 886,036 rooms in approximately 100 countries. Brands that may be familiar are Intercontinental, Holiday Inn and Holiday Express and Kimpton Hotels and Resorts. InterContinental Hotels Group PLC is headquartered in Denham, England.
Shares of InterContinental Hotels Group PLC have earned a consensus recommendation of Hold from the 14 brokerages that are covering the stock, MarketBeat reports. Three research analysts have rated the stock with a sell rating, eight have issued a hold rating and three have assigned a buy rating to the company. The average one-year price objective among brokerages that have issued a report on the stock in the last year is US$54.15. Says the company’s CEO, Keith Barr, “There is clear evidence from forward-bookings data of further improvement as we look to the months ahead.” Buy
Hilton Worldwide Holdings Inc. (NYSE—HLT)
Hilton is likely to benefit from unit expansion, hotel conversions and its loyalty program. This, along with focus on luxury development strategy, bodes well. Shares of Hilton have gained 13.5 per cent so far this year compared with the industry’s 11.3 per cent growth. However, decline in RevPAR (Revenue Per Available Room), a significant industry measure, and occupancy rates due to the coronavirus pandemic is a concern. In a bid to maintain its position as the fastest-growing global hospitality company, Hilton continues to drive unit growth. During the first quarter 2021, the company opened 105 new hotels. Hilton continues to make great progress in its luxury development strategy.
However, the company is experiencing significant declines in revenue per available room (RevPAR) in all the regions it serves. For the three months ended Mar 31, 2021, system-wide comparable revenue per available room (RevPAR) plunged 38.4 per cent on a currency-neutral basis, due to a decline in occupancy and average daily rate. Hedge fund manager Bill Ackman’s firm is singing the praises of Hilton Worldwide Holdings. “Overall, we remain very excited about the company’s prospects, and we think that while Hilton has done well from a stock price perspective during COVID, there’s a lot of upside left,” a Pershing analyst said during Pershing Square Capital Management’s recent conference call. Pershing holds the stock. The median consensus target price is $130.00. Buy.
Hyatt Hotels Corporation (NYSE—H)
As far as an outlook on the hotel industry goes, can anyone be more positive than Hyatt’s Global Head of Development and Owner Relations, Jim Chu. “Be aggressive. Continue to move forward. We never had this demand from all directions.”
The web site Seeking Alpha is bullish on Hilton as it believes the company has recovery potential as RevPAR and occupancy rates are guaranteed to improve as the economy reopens, and as demand projections continue to indicate Americans’ willingness to resume travel once restrictions are lifted. Alpha also believes that Hyatt’s stock is undervalued.
Perhaps not alone among companies, Hyatt has reduced executives’ salaries but offered them significant bonuses for reaching specific targets. Nine executives took a 50 per cent pay cut while the chairman and CEO opted to give up 100 per cent of their base salaries during April and May, “sacrifices” that could reward them with millions.
Hyatt has also announced that it will add 12 more high-end hotels in the United States and one in El Salvador. Six of the new locations, including the one in El Salvador, are part of the Hyatt centric brand, which are “full service lifestyle hotels,” while another six will be part of the Thompson brand, “boutique lifestyle” resorts that provide “world class culinary offerings”, according to the company. The company, which is notably aggressive, opened seven hotels in North America during the pandemic. Not stopping on this side of the Atlantic, Hyatt will add more than 20 new hotels across Europe, which will increase the company’s hotels in Europe to 83 from 63. While Hyatt Hotels is trading lower than it was before the coronavirus began, it has recovered lost ground and is now only somewhat below its pre-pandemic share value. Thirteen Wall Street analysts have issued ratings and price targets for Hyatt Hotels in the last 12 months. Their average twelve-month price target is $61.15, predicting that the stock has a possible downside. Hold.
This is an edited version of an article that was originally published for subscribers in the June 2021, First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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