by Warren Miller
As the clock winds down on the remainder of 2009, we can look forward to a more optimistic 2010 in the leisure travel industry. Most indicators of the travel environment have improved since their recent lows, and we think this trend can continue.
Where Are We Now?
Consumer confidence is one of the most important leading measures of the travel industry, and we gauge it using the University of Michigan Consumer Sentiment Index. Although it's not hard to remember the brutal economic conditions when confidence bottomed in November 2008, the index has rallied nearly 33% since then with a particularly high gain of 8% sequentially in December.
When consumers become more confident, it shows up in two ways. First, they tend to spend more. It's no secret that feeling safe about one's job reduces one's willingness to save and increases the desire to consume. But an often overlooked behavior that gives a nice boost to travel and leisure companies in times of increasing confidence is that consumers plan their travel and leisure purchasing decisions further in advance. That is, it feels safer to book a Caribbean cruise six months in advance when your job is secure than when you may be laid off in a week. This effect boosts cash flow for travel and leisure companies even though they can't recognize the revenue until the travel and leisure services are complete. For any travel and leisure companies in precarious debt situations--and there are many--this can be a life saver.
It's also important to note why people feel more confident so we can be sure that the rug won't be pulled out from under the surge of positive sentiment with any twitch of the financial markets. Household net worth increased sequentially by nearly 4% from the first to the second quarter of 2009. This was the first sequential gain since the second quarter of 2008. In addition, while unemployment levels remain at very high levels, the deterioration in the labor markets seems to have stabilized for the time being.
So how have these underlying economic improvements affected travel so far, you ask? First, vehicle miles driven has significantly improved. According to the Federal Highway Administration, vehicle miles driven had increased 0.6% by September since the low in May 2009 (a marked improvement compared to the near free-fall this series saw in 2008). In addition, the Bureau of Transportation Statistics cites a near 10% improvement in air passenger enplanements worldwide since the low in February 2009. Both of these indicators foretell trends in other travel spending such as cruise vacations, rental car bookings, hotel bookings, or leisure activities.
Where Are We Going?
We are optimistic that trends will continue to improve for the travel industry in 2010. Although many indicators have improved markedly since their lows, we still think there is room for further improvement before reaching more normalized levels. However, we do not expect sentiment or travel volumes to return to 2007 levels any time soon.
Oil prices present a risk to the rejuvenated travel and leisure industry. Fuel costs can affect travel either directly via gasoline prices or indirectly via ticket surcharges that cruise companies or airlines charge their passengers to hedge increases in operating costs. When such costs are passed on to the consumer, demand suffers. A rise in fuel prices is not an unlikely outcome considering the large amount of liquidity pumped into the system by the Federal Reserve and Congress during this recession. Gasoline prices, as of Dec. 7, 2009, had risen 42% over the price one year prior for all formulations according to the U.S. Department of Energy.
While travel and leisure trends have improved in recent months, we think there's further room to recover. Unfortunately, this has already been priced into most of the travel and leisure stocks we cover aside from International Speedway. Still, the stocks mentioned below are poised to benefit from further recovery in the travel and leisure industry and would represent a good way to leverage the trends mentioned at the right price.
Stocks to Watch
International Speedway (ISCA)
We think International Speedway is our only 5-star stock poised to take advantage of the travel and leisure improvement. As an added bonus, the company enjoys a wide economic moat as the leading owner of motorsports race tracks in the company due to its solid asset base and strong ties with NASCAR. Although the company had a rough year with a weak consumer and tightened corporate sponsorship budgets, we think the future of International Speedway is very promising as it experiments with new ways to increase the utilization of its race tracks.
Priceline continues to outmaneuver its competitors. The company's international growth is astounding considering the lack of appetite for travel over the last year. Priceline has leveraged its fixed costs to significantly improve profitability as well. Although Priceline is still half the size of its larger competitor Expedia, we think it has very strong brand recognition thanks to innovative products and advertising strategies.
Expedia is the largest online travel agency. As such, we award it a narrow moat because of its ability to deliver a large number of "eyeballs" to travel suppliers. Inventory affords it negotiating power when dealing with travel suppliers. Still, Expedia has not executed its strategies as well as Priceline. In addition, sites such as Kayak.com, which put Expedia on the same playing field as other online travel agents as well as travel suppliers, are a negative toward Expedia's moat.
Carnival (CCL), (CUK)
Cruise companies were bruised and battered in the recession, and Carnival was no exception. However, we think the future is bright for the company as its current fleet expansion will allow it to reach untapped markets around the world. In addition, cruising is one of the highest-value vacations available, making it an attractive choice for consumers just barely working up their courage to go on vacation again.