Over the past few months, travel stocks have been one of the strongest performing groups in the market. For example, the Invesco Dynamic Leisure and Entertainment ETF (PEJ) was up 87% from the start of November to mid-February of this year. The impetus for this move higher was the approval and distribution of the vaccine which portends an end to the coronavirus.
Case counts plummeted in the US, although they have plateaued around 50,000 to 70,000 since late February. Already, there are signs of a recovery for these parts of the economy based on upbeat commentary on earnings calls, expectations of pent-up demand, and improvement in data on a month-to-month basis. In recent days, the travel stocks have given back some gains as case counts have sharply risen in some countries.
Going forward, I believe that we will see more bifurcated price action within the sector. Think about how tech stocks have seen increased variance between different components following the Nasdaq’s big move in 2020. Similarly, watch for some travel stocks to keep trending higher, while others experience continued selling pressure. Carnival Cruises (CCL) and Delta Airlines (DAL) have further downside risk, while Skywest Airlines (SKYW) and Boyd Gaming (BYD) are two stocks likely to see more strength.
Carnival Cruises (CCL)
CCL has had an incredible run with a nearly 300% gain from the low in March 2020. However, like many momentum-fueled runs, I believe the narrative has gotten way ahead of the fundamentals.
Even after this remarkable run, CCL remains 62% below its pre-coronavirus peak of around $72. However, in terms of enterprise value, CCL has already eclipsed its pre-coronavirus level by a healthy margin. This is because the company has issued significant amounts of debt and equity to raise cash to ensure that it can survive this crisis.
While it seems to have achieved this objective, in the process, its long-term debt increased from $9.7 billion to $24.6 billion, and its total equity declined from $24 billion to $19 billion. Even when cruising resumes, the company has almost $2 billion in customer credits from cruises that had to be canceled. These are obligations of a different sort that will also eat at future earnings in addition to the company’s debt payments and equity dilution.
As a result, investors should steer clear from CCL, unless they are confident that the company’s earnings power will be higher after the pandemic than before. What I think is more likely is that the business continues to improve but the stock price underperforms.
The POWR Ratings are also not bullish on CCL as it’s rated an F which translates to a Strong Sell. The company has poor marks for most components. Notably, it has an Industry grade of F as all the cruise operators are dealing with similar issues. They’ve had to dilute shares and raise money by issuing debt that will undermine future EPS growth.
To see more of CCL’s component grades including Growth, Stability, Sentiment, Value, Quality, and Momentum, please click here.
Delta Airlines (DAL)
DAL is quite similar to CCL in many respects. The company has huge fixed costs due to the cost of owning and operating airplanes, a unionized workforce, and fees that it pays to airports. Even before the pandemic, the airline business was no joke due to competition between carriers, the variability of fuel costs, and the lack of loyalty among customers.
Thus, it seems that every decade would bring a handful of bankruptcies in the airline space. So, it’s not an exaggeration to say that the coronavirus was an existential threat to the industry. DAL reduced costs by renegotiating its contract with its unions, securing some bailout funds, and issuing more debt and equity.
Like CCL, its long-term debt exploded from $8 billion to $26 billion, and shareholder equity plummeted from $15.3 billion to $480 million. In essence, the company was able to raise nearly $10 billion in cash to ensure its survival, but I do think it will negatively impact the stock’s performance in terms of hindering EPS growth due to dilution and interest rate payments.
Further, two of DAL’s biggest sources of revenue are business travel and international travel. Both will be the last to recover. Certainly, the timeline for these segments’ recovery has to be extended given recent developments.
The POWR Ratings are also skeptical of DAL’s prospects as it’s rated a D which translates to a Sell. D-rated stocks have an average annual performance of -2.3%. DAL’s enterprise value now exceeds its pre-coronavirus peak which means that the stock should have more earnings power than it did before. This is unlikely especially given the recent bad news for international and business travel.
Boyd Gaming (BYD)
BYD is a casino stock that owns 15 different properties across the country. Its casinos in Las Vegas mainly appeal to locals, while it has the biggest casino in smaller markets like Atlantic City, Kansas City, and Cincinnati.
I believe that traffic to casinos will sharply increase due to pent-up demand as the pandemic continues to recede in the US. Many of Boyd’s regional casinos offer restaurants, concerts, shows, and nightlife in addition to gambling. It’s also less affected by the rise in global cases.
Further, BYD also has a growth component in that it’s offering online gambling in select states and partnering with companies like FanDuel to offer online sports gambling. Both are growth markets, and these categories have taken off during the pandemic. Additionally, most expect regulations in these areas to continue to loosen given changing mores and states’ need for additional revenue.
The POWR Ratings are also constructive on BYD as it has a B rating which translates to a Buy. This isn’t surprising given these two catalysts in online gambling and casino traffic increasing. It also has a Value grade of B due to its forward PE of 23 which is in line with the market average despite its above-average growth prospects. To see more of BYD’s component grades, click here.
Skywest Airlines (SKYW)
SKYW is a regional airline company that services smaller routes for the major carriers. Currently, it operates 2,400 different routes between 250 different airports. The first segment of airline travel to recover are short trips to visit family and friends or to vacation destinations. In contrast, business travel and international travel will be the last to recover especially given recent developments.
Thus, it’s better to focus on airlines serving primarily domestic travelers as its capacity will return to pre-pandemic levels first. From the TSA checkpoint data, we can see that 1.5 million people went through checkpoints yesterday. A year ago, this figure was 111,000, while it was 2.5 million at the same point in 2019.
SKYW’s revenue and earnings are expected to also significantly turn around with increased travel volumes. Last year, it had sales of $2.1 billion and EPS of -$0.18. Next year, it’s forecast to bring in revenue above $3 billion with EPS of $3.82. This growth gives it a reasonable forward PE of 13.
The POWR Ratings are also high on the stock as it is rated a B which translates to a Buy rating. B-rated stocks have an average annual performance of 19.7% which compares favorably to the S&P 500’s annual performance of 7.1%. Unlike many of its peers, SKYW did not have to issue shares or take on so much debt that it would dilute its earnings.
The POWR Ratings also evaluate stock by various components. For Quality, SKYW is rated a B. This is consistent with its long-term track record of consistent growth and recent ability to navigate the coronavirus with minimal damage. To see more of SKWY’s component grades, please click here.
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CCL shares were trading at $27.23 per share on Friday morning, up $0.32 (+1.19%). Year-to-date, CCL has gained 25.72%, versus a 11.68% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of POWR Growth newsletter. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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