The 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.
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.
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.
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 (DAL) reported $180 million in fuel-hedge losses in the last three months of 2014 as price declines accelerated, while United (UAL) lost $237 million and Southwest (LUV) lost $13 million.
American Airlines decided not to hedge last year is profiting at a record levels.
That decision has allowed American Airlines (AAL) 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 October of 2014, I acquired shares of Copa Airlines (CPA) for the Dividend Paying Large Caps portfolio. So far, the investment has worked out well.
Low fuel prices have also had a positive impact on travelers. People are suddenly enjoying more disposable income, and many are spending this on travel.
Any increase in travel will benefit both hotels and online travel agencies (OTAs). In my opinion, that sector may outperform overall the S&P 500 Index in 2015.
The other factor that makes the tourism/travel industry interesting right now is consolidation. Hotel chains are buying other hotel chains, and online travel agencies are buying other online travel agencies at an increasing rate.
Since 2010, Marriott (MAR) has acquired AC Hotels, Gaylord Hotels and, most recently, Delta Hotels in Canada for $135 million.
In 2013 Expedia acquired Trivago, and this year they also acquired Travelocity for $280 million. Expedia (EXPD) currently owns Hotels.com, Hotwire, Venere, and a few other major brands. Priceline (PCLN), 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.
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.
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, according to my research.
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 overspend 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.
In January, JC Penney (JCP), and Lukoil (LUKOY) performed well. While JCP it is not out of the woods yet, at least revenues appear to have stopped declining.
Lukoil (LUKOY) is 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 Plc. (BP), Exxon Mobil (XOM) and Chevron (CVX), Lukoil was the one with the biggest gains in January.
In January, my worst performing stocks were Adidas (ADDYY) and Ralph Lauren (RL).
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) recently reported disappointing earnings and lowered its sales forecast for the remainder of the fiscal year.
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’s a post that reflects my investment thesis on Ralph Lauren.
The investments discussed are held in client accounts as of February 13, 2015. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
I am a value investor, an investment philosophy that boils down to investing in undervalued, under-researched and unpopular companies.
Reasons for one of these three elements can differ. Some examples: special situations (e.g. a spin-off or turnaround), analyst coverage (e.g. low coverage or very negative coverage), investor fatigue (e.g. due to earnings misses), market cap (e.g. under the institutional level for market cap), misunderstood parts of the business (e.g. holdings companies), or cyclicals (e.g. sell-side often doesn't manage to look through the cycle).