This pandemic has been and continues to be devastating for the travel & leisure industry. Airlines, hotels & resorts, amusement parks, and cruises have been forced to shut down across the globe. With demand halted, these businesses are feeling the heat and are looking to the government to back them in their most desperate hour.
The $2 trillion CARES act combined with the Federal Reserve $6 trillion in liquidity for businesses in need has put a temporary backstop on the markets, with their promised support. But, are any of these stocks safe to invest in yet?
Travel & Leisure Investable?
Top travel & leisure stocks like Marriott International MAR, Delta DAL, Six Flags SIX and Carnival CCL have been hammered since the beginning of the year, with YTD declines of (46%), (59%), and (77%). The fiscal stimulus bill gave these shares a temporary boost, but DAL and CCL quickly fell back towards their lows, while MAR couldn’t keep up with the broader markets rally.
I am using MAR, DAL, SIX, and CCL to represent the markets they operate in because of their pure-play leadership in each of the sectors.
I will discuss cruise lines first because this pandemic has hit them the hardest. The story about Carnival’s Diamond Princess that was supposed to be a 14-day luxury cruise around the islands of Japan and southern China ended up being a month-long trip from hell. A passenger tested positive for the novel coronavirus 3 days before the ship was scheduled to dock. The 2,666 passengers were quarantined in their small cabins for the remainder of the extended voyage, while the number of confirmed cases racked up. There were over 700 confirmed cases by the time the cruise finally got all the passengers off.
This was not the only cruise that experienced the virus’s rapid spread in close quarters. This news has tabooed the cruise line industry and left it with a deep scar that will not quickly fade. These cruises are going to miss out on their peak season this year, and many consumers are going to be apprehensive about getting on a cruise ship for years to come. Being in close quarters with many people you don’t know is the epitome of what we are being conditioned to avoid.
Cruise lines are yet to see any government relief, and I see bankruptcy and consolidation in the future of this space. I would stay away from these equities until there is more clarity on outlook.
The coronavirus has hammered Six Flag’s parks and, like cruises, will likely be tabooed for some time, with people wanting to avoid large crowds and seedy environments.
Six Flags was forced to file for chapter 11 bankruptcy in 2009 because of its excessive leverage going into the financial crisis. The parks weren’t able to sustain demand, and cash-flows were unable to match debt obligations. The company was handed over to bondholders who recapitalized the company and brought them out of the ashes.
Today the theme park giant has amassed almost as much debt as its pre-bankruptcy levels. Six Flags is operating quarter to quarter, just hoping that they will have enough income to cover the massive interest expense, which made up 63% of last year’s net income. The coronavirus scare could be the catalyst of a second bankruptcy, and this time it could be a complete liquidation of assets (chapter 7 bankruptcy).
I can’t mention amusement parks without discussing Disney DIS and its massive international theme park exposure. Disney’s 12 parks are closed indefinitely, and JP Morgan (JPM) is estimating that this will cost the company as much as $5 billion in 2020.
Despite the company’s extensive theme park exposure, DIS is only down 28% this year. The future growth of Disney is going to come from its newly released direct-to-consumer platform Disney+, which has outperformed expectations. Disney+ surpassed 50 million subscribers last week, just 5 months after its launch. The number of subscribers grew by more than 22 million in only 2 months. A lot of this can be attributed to its international expansion in late March. The quarantines mandated across the globe is no doubt boosting subscription growth.
I like DIS at any price below $100, and I would avoid SIX at any price.
Airlines have seen a substantial decrease in travelers due to this global pandemic, but they have not completely halted operations. The US government will not allow airlines like Delta to fail because they serve an essential function in our global economy.
Some of these companies are highly leveraged and not very liquid, which could lead to bankruptcies and consolidations. American Airlines AAL, for example, is funded almost entirely by debt, and it has over $12.3 billion in obligations for 2020. With demand at an all-time low and paper-thin net margins, I am not sure how much longer AAL will stay afloat, especially if they completely halt air travel.
Delta will likely survive this pandemic because it is the biggest and one of the best-capitalized airlines. Still, I am not rushing into these shares until we have more clarity on financial support and economic shutdown timelines. People are going to be scared to fly until a vaccine or treatment is released, which is likely more than 1-year out. This pandemic is expected to hurt airlines more than any event in history. Now the question is, how much of this pain is baked into the shares already?
Hotels & Resorts
Marriott, the largest hotel chain in the world, is shuttering 25% of its worldwide locations, and its revenue per available room is down by 23% in Q1. I expect this to fall even further in Q2. The company is cutting costs fast and has been forced to furlough tens of thousands of employees. Marriott has reduced its G&A by 30% and will likely continue to do so.
MAR just entered into another $1.5 billion credit line, and its credit rating remains investment grade despite the short-term uncertainty.
I do not believe that hotels will hold the same level of long-term taboo that cruises, amusement parks, and airlines do. With everyone pent up in their homes for such an extended period, consumers are going to have a strong desire to go on vacation once the quarantine is lifted.
Driving is likely going to be the preferred method of travel, but people are still going to need to stay somewhere, and I would trust a regulated hotel room over an Airbnb every day. I think we will see a big uptick in hotels & resorts once the economy opens.
I am not rushing to invest in the travel & leisure industry because of the substantial risks I just discussed. Still, out of the stocks that I mentioned, I would keep an eye on DIS and MAR for a discounted buy when the market pulls back again. DAL is another one to keep an eye on, but I wouldn’t invest in any airlines until more color is provided about the industry's outlook.
I wouldn’t touch CCL or SIX as I see both of these stocks having the potential to fall to 0.
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