How to Invest in Travel Stocks

Worth an estimated $2.3 trillion last year, the global travel and tourism market is one of the biggest industries in the world. As standards of living around the world have improved and travel has become cheaper, the industry has steadily expanded as more people have money to spend on discretionary trips and tourism. Traveling internationally is much more affordable than it once was, and the number of international tourist arrivals more than doubled from 2005 to 2015 to 1.19 billion. While the industry is steadily growing, travel companies and stocks tend to be macroeconomically sensitive as tourism is dependent on discretionary spending, and recessions or global crises like 9/11 can crush the industry.

Investors in travel stocks will want to focus on one or more of the four major publicly traded components: Big chain hotels like Marriott (NASDAQ: MAR) and Hilton (NYSE: HLT), commercial airlines like United Continental (NYSE: UAL), American Airlines (NASDAQ: AAL), and Delta Air Lines (NYSE: DAL), online travel agencies like Priceline Group (NASDAQ: PCLN) and Expedia (NASDAQ: EXPE) that help people save money on hotel and airfare bookings, and finally cruise lines like Royal Caribbean (NYSE: RCL) and Carnival Cruise Lines (NYSE: CCL), which may be the most economically sensitive sector.

The chart below shows the size and recent performance of these stocks.

Company Market Cap 1-Year Return
Marriott $49 billion 62.6%
Hilton $25.7 billion 39.8%
United Continental $20.3 billion 24.5%
American Airlines $25.1 billion 12.3%
Delta $39.6 billion 12.9%
Priceline Group $89 billion -5.9%
Expedia $19.2 billion 11.2%
Royal Caribbean Cruises $26.6 billion 51.4%
Carnival Cruise Lines $47.6 billion 27.4%

Let's take a closer look at each subsector in the travel industry to see what each has to offer.

A place to lay your head

Hotel stocks have surged over the past year as a wave of consolidation and a strong global economy have lifted profits. Room rates continue to rise steadily and occupancy rates are also rising, in spite of the threat from Airbnb and other home rental services. In fact, hotel groups have been engaged in a regulatory war against Airbnb, accusing the $31 billion start-up of operating illegal hotels and encouraging cities to crack down on the site.

That threat may have prompted deals like Marriott's 2016 acquisition of Starwood as Airbnb now has more available rooms, with 4 million listings, than the top five hotel brands combined. The disruptor continues to grow at a brisk pace as revenue reportedly doubled to $1 billion in the last quarter and the company has been profitable on an EBITDA basis for 17 months. Airbnb has also been targeting business travelers, aiming at a core market for hotels. Still, for now it seems that hotels and Airbnb can coexist. If the global economy remains strong, hotel stocks should continue to do well. Keep an eye on occupancy and room rates. If both keep rising, hotel stocks should too.

We have liftoff

For years, airlines were one of the least profitable industries as overcompetition led to price wars that ate into profits and unpredictable economic conditions forced companies into bankruptcy or mergers. Today, just four airlines, American, Delta, United, and Southwest, claim more than 80% of the U.S. airline market. As a result, profits have increased in recent years thanks in part to lower fuel prices. Still, more recently fuel prices have begun rising again, and competition seems to be increasing as shares of one-time stock market darling Hawaiian Holdings fell sharply due to incoming competition in the Hawaiian market.

Today, airline stocks look cheap with P/E ratios for major carriers in the low double digits. That could create some opportunity in the industry, but it seems like the usual challenges like oil prices, competition, natural disasters and global turmoil will continue making the sector a volatile one. Pay attention to key industry metrics like PRASM (passenger revenue per average seat mile) as a reflection of the companies' execution.

The disruptors

The advent of the internet changed the nature of travel bookings. No longer do people rely on a travel agent, but instead search for airfares and hotel rooms through online travel agencies. Priceline and Expedia have come to dominate this market over the last decade through a series of acquisitions and no travel stock has done better than Priceline, which has surged more than 1,600% over that time. Competition has increased among OTA's with the debut of Trivago on the public markets and TripAdvisor's attempts to break into bookings, and Airbnb is also a threat to the industry as hotel rooms are the major source of revenue for these companies.

While Priceline shares dove after its most recent earnings report on weaker-than-expected guidance, the company still looks like a strong bet with its dominance of the European market through and other smart acquisitions like Kayak and Momondo. Priceline's international exposure also keeps margins high. With steady growth expected this year and its valuation lower after the recent dip, the company should have another solid year.

Sail the open seas

A historically volatile industry, cruise lines have also done well recently as Royal Caribbean has more than tripled in the last five years. Industry leader Carnival Cruise Lines has lagged behind, but the overall market for cruises still looks strong. Carnival controls nearly half the industry and sees a big opportunity in China, which is just 6% of its market today but is expected to eventually become its biggest one.

Like airlines and hotels, cabin capacity is a key measure to watch as cruise ships need to fill their seats, and also like airlines, fuel is a key cost input so oil prices affect profits. Natural disasters like hurricanes also pose a threat to the industry. Still, profits have been near historic highs recently, riding the strong economy and growing travel market.

For investors considering travel stocks, the two most important issues to watch are macroeconomic factors, which have an outsized impact on expensive, discretionary pursuits like travel and tourism, and Airbnb, which is growing quickly and poses a direct threat to hotels and online travel agencies.

The industry is notoriously volatile, but with the economy humming along, 2018 looks like it will be another strong year for travel stocks.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Priceline Group and TripAdvisor. The Motley Fool recommends Carnival, Expedia, Marriott International, and Trivago. The Motley Fool has a disclosure policy.