What follows is a list of companies engaged in the travel and/or transportation sector. They cover a variety of industries: cruises, railroads and airlines. Each one of these companies face unique doubts: accidents, coal trends and high costs. I find excellent upside for both CSX (CSX) and Southwest Airlines (LUV) due to their low multiples and solid growth rates. Carnival (CCL) appears to be a bit high for its sector, and I doubt how well the company will perform (despite the 1.4 beta) as a result of the Costa Concordia accident.
Carnival trades at a respective 15.9x and 14.2x past and forward earnings. Consensus estimates for Carnival's EPS forecast are that it will decline by 33.5% to $1.61 in 2012 and then grow by 40.4% and 22.6% in the following two years. Assuming a multiple of 16x and a conservative 2013 EPS of $2.22, the stock would hit $35.52 for 9% upside.
While the 3.1% dividend yield may be alluring to income investors, I think this shareholder friendly policy will lose its appeal in the midst of a full recovery and especially if the Obama administration raises taxes on dividends. I also am not optimistic about the company's exposure to Europe where consumer expenditures are expected to stay depressed longer than what is the case domestically. At the same time, the lack of emerging exposure will increase investor fatigue when other transportation companies benefiting from free trade take off.
CSX trades at a respective 12.9x and 10.4x past and forward earnings. Consnesus estimates for CSX's EPS forecast that it will grow by 7.8% to $1.80 in 2012 and then by 15% and 13.5% in the following two years. Assuming a multiple of 14x and a conservative 2013 EPS of $2.04, the stock would rise by 32.5%.
I am optimistic about CSX and, in general, railroads, because I believe the concerns over coal have been overblown. I find that this will driver high risk-adjusted returns as industrialization continues in emerging markets. CSX is led by top management that has diversified the company well across a variety of segments. I believe that intermodal represents a sizable catalyst for the company going forward.
Southwest trades at a respective 35.8x and 8.2x past and forward earnings. Consensus estimates for Southwest's EPS forecast that it will grow by 58.1% to $0.68 in 2012 and then by 52.9% and 16.3% in the following two years. Assuming a multiple of 12x and a conservative 2013 EPS of $1, the stock would rise by 45.8%.
With only a multiple of 8.2x necessary for appreciation, I believe much of the downside has been eliminated. At the same time, the industry is undergoing consolidation. Southwest previously merged with AirTran and now it is looking like US Airway (LCC) will take over US Airways (AAMRQ.PK).
Given all of the bankruptcy and cost concerns surrounding airlines, I believe that M&A is more accretive to value than what the market acknowledges. Union power would likely be weakened and fixed costs could be spread out. In addition, location is key and gaining access to key spots is more a game of chess than anything else. Fail to see your opponent's move in advance and risk the end game several moves later. The best way to account for your opponent's moves is through internalizing them.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.