Stocks & Markets

Stressful Times for Leisure Stocks


This summer the tourists are slowly coming back, even if you wouldn't know it from looking at the stocks of cruise operators, casinos, and hotels.

While the broad Standard & Poor's 500-stock index is down 12.9 percent since Apr. 23, cruise company Royal Caribbean (RCL) is down 33.5 percent and its rival Carnival (CCL) is off 26 percent. MGM Resorts (MGM) has tumbled 38 percent, and auto rental giant Avis Budget Group (CAR) has plunged 36 percent.

What's constraining tourism stocks is the suspicion that the recent recovery in the leisure travel business can't last. "We think they're set up for continued disappointment," says Tom Samuels, managing partner at Palantir Capital Management, who has sold all his travel-related stocks.

Among the trouble potentially facing the U.S. tourism industry, according to investors and analysts: an oil spill in the Gulf of Mexico that could mar beaches or divert cruises; a stronger dollar and economic troubles in Europe that could discourage visitors from overseas; and high U.S. unemployment and falling consumer confidence—particularly evident in the last couple of months—that could dissuade Americans from splurging on travel.

"We might have created a number of excuses for consumers to step back," says Tom Villalta, chief investment officer at Jones Villalta Asset Management, which does own travel stocks MGM, Royal Caribbean, and Disney (DIS).

Stock Market Influence

The falling stock market itself can be a problem, as Carnival Chief Operating Officer Howard S. Frank said in a June 22 call with analysts. "We believe this caused consumers, especially those in North America, to rethink their discretionary travel decisions," he said.

Market performance heavily influences consumer confidence, which in turn is the "No. 1" factor affecting tourism demand, says Morningstar (MORN) analyst Warren Miller. "They're more affected by consumers' willingness to purchase rather than ability to purchase," he says. The Conference Board's consumer confidence index, released June 29, fell from 62.7 in May to 52.9 in June.

The good news is that there is little solid evidence that consumers are actually canceling travel plans. Carnival's Frank also said, "Over the last 13 weeks it's fair to say that demand for cruises has been solid and we've continued to achieve higher year-over-year price increases." Carnival executives added that they had seen no impact from the oil spill or European economic problems.

Data from the hotel industry confirm that travelers are slowly returning.

According to travel research firm STR, hotel occupancy rates were up 6.8 percent from a year earlier to 69.7 percent in the week ended June 26. The average daily rate charged to hotel guests was up 1.1 percent to $98.79.

"We really haven't seen any kind of weakness," says STR Senior Vice-President Bobby Bowers.

Summer Estimates

Overall, STR estimates the summer travel season will see occupancy increase 4.3 percent and the average daily rate remain flat, up just 0.1 percent. Though that would be an improvement, it comes off a terrible 2009 for the hotel industry. Last summer, STR estimates, occupancy rates plunged 9.1 percent and the average daily rate dropped 9.6 percent. "Last year a lot of people didn't travel at all," Bowers says.

One worrying statistic for the tourism industry, however, is that, while luxury hotel rates rose 6 percent in the most recent STR report, rates at economy hotels actually fell 2.7 percent.

"The high end is still spending and taking nice vacations," Samuels says. "But the much bigger middle is pulling back."

The weak labor market may be a factor, with the U.S. unemployment rate at 9.5 percent in June.

"We are cautiously optimistic about the environment going forward," Choice Hotels (CHH) Chief Executive Officer Stephen Joyce told an Oppenheimer (OPY) investment conference on June 29, "but without real job creation, it feels a little fragile [to] us."

Resorts, hotels, and cruise ships might need to continue discounting heavily to attract customers. As hotels try to raise prices, "we think there is going to be pushback from the consumer," Joyce said.

Much depends on how much of a priority consumers place on travel. After almost two years of shorter trips to closer destinations, consumers might be eager to book big vacations—regardless of the broader environment.

"There is some pent-up demand there from people who have been holding back," Villalta says. "With a glimpse of improvement in the economy, we're going to see people return to prior habits of travel."

Steverman is a reporter for Bloomberg News in New York.

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