Michael Brush: Memorial Day weekend is a traveler’s nightmare but a dream for travel-related stocks

Michael Brush: Memorial Day weekend is a traveler’s nightmare but a dream for travel-related stocks
By: market watch Posted On: May 26, 2023 View: 60

If the jam-packed Memorial Day travel conditions have you thinking there must be an investment play in all the chaos, you are right. Post-pandemic wanderlust is real. It is only going to pick up from here. And the trend is not yet fully priced in to travel-related stocks.

Here’s more detail on three key business drivers and four of the best stock plays on this theme, according to insiders. 

1) Global airline traffic rose 52.4% in March compared to the year before, says the International Air Transport Association (IATA). Air-travel growth in the Asia-Pacific region was phenomenal at 159%. Growth in Europe was strong at 37%, and North American growth was 17%. 

2) Air-travel growth will continue. A recent IATA survey found 79% of travelers are planning a trip between June and August. Forward bookings released in the May 16 report show 135% travel growth ahead in Asia-Pacific, 40% growth in Europe, and 14% growth in North America. Globally, traffic is now at 88% of March 2019 levels. This suggests room for more growth. 

3) Insiders at travel-related companies are buying their company’s shares in large size. This tells us the expected travel growth is not priced in to these stocks. 

The best way to play the travel growth trend is to buy the travel-related stocks of companies where insider buying is strongest. Here are four to consider:

1. Delta Air Lines (DAL)

As air travel grows sharply, capacity constraints make the post-pandemic wanderlust even more lucrative for airlines. This supports price increases. 

Delta Air Lines DAL, +0.39% recently reported first-quarter passenger revenue was 50% higher than in the first quarter of 2019, while flight capacity was flat. Rising costs have held back profit growth. But summer bookings are strong and the cost picture improves in the second half of 2023. 

Costs rose because of the need to train thousands of new employees and renegotiate supplier contracts. Delta will also refurbish some airport hubs in coming months. But then these profit drains should recede, leading to a better cost picture in the second half. 

Delta Air Lines is one of the better legacy carriers to invest in because it attracts business travelers. Its cabin format offers business travelers a variety of options, and its credit card partnership with American Express AXP, +4.08% pulls them in, too. 

By valuation metrics such as forward- and reverse p/e and price to sales, Delta trades at about a 50% discount to five-year trailing valuations. This explains why a director with a decent buying record recently bought $500,000 worth of stock at around $33 to $34 per shares, according to EZ Insider, an insider-tracking website provided by The Washington Service. 

Delta is not “forever hold” stock. Its sector tailwinds will not last forever. And the airline sector has a long history of irrational price wars. Those bad old days could return at some point. 

2. Caesars Entertainment (CZR)

When travelers get off their flights, many will end up at the casino tables and hotel rooms of this giant gaming company. 

From humble beginnings in Reno NV during the Great Depression, Ceasars Entertainment CZR, +1.81% has grown into the largest U.S. casino company. It also operates under the Harrah’s, Horseshoe, and Eldorado brands. The company has 51 properties in 16 states with 47,200 hotel rooms. 

Ceasars reports losses, but revenue growth has been phenomenal as people hit the road again. First-quarter revenue grew 23.5% to $2.83 billion. Casino revenue was up 22.7%. Food and beverage operations grew 26%, while hotel revenue grew 31.3%. 

Both leisure and convention demand are up sharply and capacity is tight, so pricing power is back. Ceasars gets 40% of its revenue from Las Vegas and 49% from regional properties. Ceasars also has a relatively small but promising digital-gaming business. The company boasts 60 million loyalty customers it can entice into digital gaming.

While Ceasars is a good wanderlust play, it is also a gamble, ironically. One risk is that it has no moat around its business. As states continue to expand gaming, this casino giant faces fresh competition. The company has a lot of debt at $13.2 billion. But it also has nearly $1 billion in cash, and it has been paying down that debt. Ceasars expects to retire $1 billion worth of debt in 2023. If the U.S. does endure a sharp recession this company will suffer, but recession is not in my forecast. 

Morningstar analyst Dan Wasiolek has an $81 a share fair-value estimate on the company, meaning this is what he thinks the stock is worth now. The stock is much lower at around $42; Ceasars gets a four-out-of-five star rating at Morningstar. A director agrees the stock looks cheap. He bought $1.1 million worth at $45 in April, according to EZ Insider. 

3. General Dynamics (GD)

While General Dynamics GD, +0.44% is known as a defense contractor, it also makes business jets. This is the business that will continue to pick up as post-Covid wanderlust continues. The company sells Gulfstream business jets and has an aircraft servicing arm. Besides travel growth, the business jet division will benefit from new models over the next few years, called G700, G800, and G400.

General Dynamics stock has been weak because for the first quarter, reported in late April, General Dynamics offered a surprise decline in operating margins, particularly at Gulfstream. The company also said the second quarter will be “aberrant” due to supply chain issues hitting Gulfstream and some defense businesses, and contract delays. It says these issues probably won’t resolve until the third quarter. That’s not far off, which means the recent stock weakness looks buyable. 

One insider agrees. A director with a solid buying record recently purchased $1 million worth of stock at $214.47. This is a good signal, and a confirmation that the current problems hurting first quarter results will probably go away — as the company predicts. 

4. Apple Hospitality (APLE)

The “other Apple,” this real estate investment trust (REIT) based in Virginia owns 220 hotels. Apple Hospitality APLE, -0.21% operates in urban, high-end suburban and developing markets in 37 U.S. states. The hotels operate under brands including Marriott, Hilton, Hampton, Courtyard and Hyatt Place. 

Apple Hospitality has a lot of exposure to Southern states that are benefiting from robust migration trends. Its biggest presence is in Florida, Texas, Alabama, Arizona, Virginia and California. 

Thanks to post-pandemic wanderlust, occupancy and room rates were considerably higher in the first quarter. This drove revenue up by 19.6% to $311.4 million. Room rates grew 11% to $152 from $137, and occupancy was up 7.5%, to 72% from 67%. The all-important hotel metric “revenue per available room” advanced 19% to $109.50 from $92. Net income grew 83% to $32.9 million from $18 million.

Management guided for continued growth — not surprising given the travel trends. “Booking trends remain strong, the supply picture is favorable, and improvements in business travel have lifted midweek occupancies in recent weeks,” said CEO Justin Knight when Apple Hospitality released quarterly results on May 2. 

Despite the vastly improved business trends, the stock has gone nowhere in the past year, which seems odd. Apple Hospitality pays a decent 6.5% yield. A cluster of insiders bought $103,000 worth of stock in March and May at $15.50 a share. 

Michael Brush is a columnist for MarketWatch. At the time of publication, he owned CZR. Brush has suggested DAL, CZR and GD in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks

Read: Expect big crowds for the summer travel season — and big prices, too

Plus: Gas will be much cheaper this Memorial Day Weekend. Now, for all the bad news.

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