U.S. consumers look like they are beginning to pull back on travel spending, the data show. But it could be an illusion and some stocks remain white hot.
Most of the key indicators reflect domestic demand and mask the continued boom from consumers vacationing overseas.
At first glance the data certainly point to a softening. Airline fares fell for a second consecutive month in May, according to U.S. inflation data, while hotel demand has also receded for two straight months, the U.S. travel association said. Hotel occupancy rates and revenue per room have also fallen year over year for the past two weeks, according to STR data.
While investors might be tempted to take profits, significantly, the above data largely track domestic trends, so there are still opportunities to be had from stocks exposed to this summer’s white hot international travel demand.
As Americans shift their vacation preferences, and spending, from at home to overseas, investors may want to consider doing the same with travel stocks.
“We do not believe such weakness is recession-related, rather following three summers where Americans vacationed domestically, we observe that they are heading internationally this summer,”
Truist
analyst Patrick Scholes said.
The data check out. London hotel room rates surged close to 20% in May, STR said last week, while Amsterdam rates hit record highs in April. Airfares to Europe from the U.S. are averaging $1,200 per round trip, online travel agency Hopper said—the highest in more than five years.
Considering this, investors may want to consider these stocks, which are exposed to international markets.
Staying Power
Truist’s analysts said
Hyatt Hotels
are their favorite hotel stock, for that very reason. They noted that around 30% of Hyatt’s earnings come from its Caribbean-centric Apple Leisure Group business, and said it would also benefit from the strength of leisure demand in Europe. Scholes said he sees more pressure on U.S. resort and leisure hotels due to the return of cruising demand and supply growth in short-term rentals.
Hyatt stock has risen around 25% so far in 2023 but Wall Street is confident it can move higher. Analysts covering the shares have an average price target of $128.35, implying a 13% upside to Friday’s price. The shares are more expensive than those of Hyatt’s peers, trading at 32 times estimated 2024 earnings, compared with the industry average of 21 times, according to
FactSet
data.
Analysts expect Hyatt’s second-quarter earnings to jump 87% from the same period in 2022, with growth then slowing to around 25% in the third quarter. But the strong international travel trends mean upside surprises could be on the cards.
Ship Shape
Cruise line stocks have led the travel industry’s march higher in 2023, partly because the sector’s post-Covid recovery has lagged others.
Royal Caribbean
(RCL) is up 93% so far in 2023,
Carnival Corp
(CCL) has climbed 97%, and
Norwegian Cruise Line Holdings
(NCLH) is up 56%. Cruise operators are internationally focused by their very nature, so it’s no surprise they are having a good year.
Investors may feel they’ve missed out on the rally but Melius Research analyst Conor Cunningham said they “still have room to move higher.”
“Royal [Caribbean] has been the poster child for the financial recovery in the cruise industry and appears well-positioned for earnings growth,” he added.
The cruise operator’s stock may have almost doubled in 2023 but it still sits around 30% below its prepandemic January 2020 high, suggesting more gains could be ahead. Wall Street isn’t so sure—analysts have an average price target of $92.77, implying a 3% downside from here. Yet 63% of those covering the stock rate it Buy, 37% have a Hold rating, and there are no Sell ratings.
The shares are relatively cheap, trading at 13.6 times estimated 2024 earnings, compared with the FactSet industry average of 15.9 times. Analysts expect strong second- and third-quarter earnings growth in 2023 and again in 2024, with the other two quarters—typically quieter in the cruise industry—also enjoying growth.
Ready for Takeoff
Airline stocks are defying the domestic data at the moment.
Airfares fell 3% in May, after a 2.6% decrease in April, according to May’s Consumer Price Index data. On an annual basis airfares fell 13.4%—the largest drop since March 2021. Falling airfares point to softening demand, but the slump is not quite as bad as those figures might suggest.
Firstly, the White House’s Council of Economic Advisers said declining airfares reflected lower fuel costs, highlighting it as an example of falling energy prices passing through to core inflation. Also, fares were at record levels in May 2022—the comparable month.
J.P. Morgan
analyst Jamie Baker told Barron’s CPI is “highly skewed” to domestic data and that “there’s currently an ongoing year/year shift from domestic to international destinations.”
The international shift may also explain airline stocks’ recent hot streak.
Delta Air Lines
(DAL) enjoyed a record 15-day winning run from the Thursday before Memorial Day weekend to Friday last week.
United Airlines
(UAL) and
American Airlines
(AAL) had their own eight-day streaks snapped on the same day. It’s no coincidence those three carriers are the most exposed to international travel. Close to 40% of United’s 2019 revenue came from overseas travel, compared with Delta’s 30% and American’s 25%, according to Melius Research data.
Baker put the recent outperformance down to lower fuel costs, in a recent note, but said J.P. Morgan continues to prefer airlines with “exposure to the booming international market.” It has Overweight ratings on American, Delta, and United, and Underweight ratings on the more domestically focused
JetBlue Airways
(JBLU) and
Spirit Airlines
(SAVE).
The softening, or normalizing, of domestic demand is good news for the Federal Reserve in its battle against inflation. But at the same time it’s no bad thing for travel stocks, as long as they are exposed to the summer international boom.
Write to Callum Keown at [email protected]
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