Improvement in the travel sector may signal economic recovery and new opportunities

by admin on February 10, 2015

Expedia-PricelineThe global economy is a complex machine, the result of many small transactions that take place in different markets and sectors. When a particular sector is down, another may be up, and vice versa. Money moves around as things change, and in our world, change is a constant. When changes are taking place, opportunities abound. The key is in understanding the present without losing perspective on the past.

Some of the most recent dynamic changes in our economy have opened the door of opportunities in a variety of sectors that were not attractive just few months ago. As I mentioned here, the energy sector is currently a very interesting sector for value investors with a long-term view. Another sector that I believe is becoming interesting is the tourism/travel industry. There are few reasons for this:

Low Fuel Prices

Thanks to low gas prices, airlines are profiting from traveling like never before. When oil prices shot up a few years ago, many transportation businesses started adding fuel surcharges. Now, fuel prices are plunging, but many of those surcharges remain. As the year progresses and airlines start reporting big increases in revenues year over year, stock prices should move up quickly. The drop in the cost of oil is always a huge factor in the airline industry where 30 percent of all expenses are fuel related. Airlines that are still down now are down because they locked in the price for a portion of their total fuel spending in 2015 through hedging. Delta reported $180 million in fuel-hedge losses in the last three months of 2014 as price declines accelerated, while United lost $237 million and Southwest lost $13 million. American Airlines decided not to hedge last year is profiting at a record levels. That decision has allowed American Airlines to take full advantage of the steep plunge in fuel prices. This year’s net income for American may be above $5 billion.

Thanks to the consolidation of the airline industry there is no pressure to lower prices anytime soon. In 10/24/2014 I acquired shares of Copa Airlines (CPA) and since then the stock is up 13.55%, the company is paying 3.3% dividend and the return of equity is at 22.61%.

Low fuel prices have also had a positive impact on travelers. People are suddenly enjoying more disposable income, and may are spending this on travel. Any increase in travel will benefit both hotels and online travel agencies (OTAs). I expect that sector to outperform the S&P 500 in 2015.

Consolidation

The other factor that makes the tourism/travel industry interesting right now is the industry consolidation. Hotel chains are buying other hotel chains, and online travel agencies are buying other online travel agencies at an increasing rate. In 2010 Marriott acquired AC Hotels, then in 2012 Gaylord Hotels for $210 million, and most recently in 2015 they acquired Delta Hotels in Canada for $135 million. On the online travel agencies side similar takeovers are occurring. In 2013 Expedia acquired Trivago, and this year they also acquired Travelocity for $280 million. Expedia currently owns Hotels.com, Hotwire, Venere, and a few other major brands. Priceline, which is the other major competitor in the market, owns Booking.com and Agoda. In 2013, Priceline acquired Kayak for $1.8 billion, and they may now be targeting Orbitz that recently hired bankers to find a buyer. New entrants will have a hard time getting any share of the market if this trend continues. These companies will also benefit from economies of scale.  Online travel agencies (OTAs) are the fastest growing distribution channel globally, and the two largest, Priceline and Expedia, outpace the market by no small margin. Combined gross bookings of the two jumped from 38% of global OTA sales in 2011 to 47% in 2013. The continued, super-charged organic growth of Priceline’s Booking.com, as well as Expedia’s assumption of the Travelocity volume largely in 2014, mean that global share of the two leaders will only accelerate in 2015.

Channel shifting

Hotels in general use four different channels to acquire guests. The first is property direct or when future guests book directly through the hotel, either booking on-site or through the commercial department of the property. The second channel is the reservation center, which is the segment of future guests that call the hotel to make a reservations. The other two channels are online: web direct, when the customers book through the hotel’s direct website, and online travel agencies (OTAs), which is when reservations come to the hotel from third party sites.

According the U.S. Travel Advertising Marketplace: Industry Sizing and Trends 2015, in 2013, 42% of gross bookings came through online channels. This represents a tectonic shift for the industry, as of 2013, online channels captured more travel ad dollars than offline for the first time. Bookings coming from online travel agencies are growing at double-digit rates per year, while direct bookings from properties and reservation centers are having an increasingly hard time keeping up. I expect this shift to continue for the next few years, which will benefit any company participating in or facilitating an online booking channel.

Natural Growth

The travel industry, and the hotel industry both continue to grow every year. In 2014 U.S. hotel industry’s occupancy was up 3.6 percent to 64.4 percent.  The average daily rate rose 4.6 percent to US$115.32; and revenue per available room increased 8.3 percent to US$74.28. Stocks of these industries are still being traded at reasonable prices, but may grow naturally as a result. Of course there may be hiccups along the way because the travel industry is very sensitive to forex exchange variances and also because some of these industries may over spend on expansions or acquisitions. For example, Expedia is making key investments in Trivago’s top-line growth, sacrificing near-term profits to fund global expansion. Trivago benefited from an estimated $108.5 million TV advertising campaign in the U.S. alone — the largest of any online travel brand — and generated just $4 million in adjusted EBITDA in 2014. In the long term, it is an attractive industry where interesting changes currently taking place. As long as these companies continue to grow at a double-digit rates, it may be an attractive sector to examine more closely.

Summary Portfolio Performance

Since inception (01/19/12), the model is up 42.4%, versus the S&P 500 68.3%. The return of the S&P 500 in January 2015 was -3.11%, as compared with -2.10% for my Dividend Paying Large Caps portfolio. My portfolio had a good start in 2015, beating the S&P 500 by 1.01%.

Gainers

In January, JC Penney (JCP), and Lukoil (LUKOY) performed well. They were up 12.2%, and 5.4%, respectively. While JCP it is not out of the woods yet, at least revenues have stopped declining. Revenues dropped -8.23 billion from 20.19 billion to 11.96 billion between July 2007 and October 2013. However, since then, revenues have been up, and have not fallen below that level again. The full recovery of JC Penny may take few years more, but those who have the patience to wait it out may reap the rewards. Lukoil (LUKOY) in one of the biggest global oil companies and have been suffering through the crisis the same as the entire sector. However, it appears that Lukoil may be recovering faster than other oil companies. When compared with other oil companies such as BP, Exxon Mobil or Chevron, Lukoil was the one with the biggest gains in January. So far this trend continues in February as well.

Losers

In January, my worst performing stocks were Adidas (ADDYY) down -13.3%, and Ralph Lauren (-9.9%). Adidas was down as a consequence of the bad economic news coming from Europe. Also the re-valuation of the US dollar against the Euro was not good news for Adidas, receiving less in dollar amounts for its products will certainly have a negative impact on Adidas’ financial performance. Ralph Lauren (RL) was down ahead of its earnings report that took place on February 4th when the company reported disappointing earnings and lowered its sales forecast for the remainder of the fiscal year. That day the stock dropped an additional 18.22%, the lowest closing level since July 12, 2012. I believe Ralph Lauren is one of a kind in the apparel sector, and I’m sure the company will recover in no time. Here are some of the reasons why I’ll continue to hold my investment in Ralph Lauren.

Acquisitions in January 2015

No positions were added in January.

Liquidations in January 2015

No positions were liquidated in January.

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