Markets & Finance

Travel Stocks: Don't Book Now


S&P's Sam Stovall says the Hotels, Resort & Cruise Lines index has poor price outlook and that travel's fundamentals are negative

From Standard & Poor's Equity ResearchThe Standard & Poor's 1500 Hotels, Resort & Cruise Lines subindustry index recently saw its relative strength ranking weaken and fall into the bottom 30% of all subindustries in the S&P Composite 1500 index (consisting of the S&P 500, MidCap 400, and SmallCap 600 indexes). The relative strength ranking is based on the trailing 52-week price performance for all sectors and subindustries in the S&P 1500.

Year-to-date through Aug. 22, this subindustry index was down 16.9%, vs. an 11.1% decline for the S&P 1500. During 2007, this subindustry slumped 14.1%, vs. a 3.6% advance for the S&P 1500.

Take a look at the accompanying chart. The jagged blue line represents the subindustry index's rolling 52-week price performance, compared with the 52-week performance of the S&P 1500. Any point above 100 indicates the market outperformed the prior year while points below 100 indicate it underperformed. The red line is a rolling 39-week moving average, while the two green bands indicate one standard deviation above and below the index's long-term mean relative strength.

Sell Recommendations

S&P equity analysts cover 11 large-, mid-, and small-cap companies in the Hotel, Resort & Cruise Lines subindustry, four of which are components of the index. Seven of those 11 stocks carry 2 STARS, or sell, recommendations: Carnival Corp. (CCL), Carnival PLC (CUK), Gaylord Entertainment (GET), Intercontinental Hotels Group (IHG), Interstate Hotels & Resorts (IHR), and Royal Caribbean Cruises (RCL). One company has a 1 STAR, or strong sell, recommendation: Starwood Hotels & Resorts (HOT).

"We have an overall negative fundamental outlook for the hotels, resorts, and cruise lines subindustry," notes S&P equity analyst Mark Basham. S&P has a mixed outlook for foreign intra-regional travel, with Europe likely to weaken, while the Middle East and Asia continue to grow. Basham says S&P anticipates further deterioration in demand among domestic business and leisure travelers, as well as less outbound international travel from the U.S., factors likely to outweigh the positive news in Asia.

In 2008, S&P expects demand for U.S. hotel rooms to fall by about 1%, with declines in both transient business and leisure-guest counts. Furthermore, Basham expects demand from large business groups to weaken in the second half. Demand from international tourists remains the bright spot for U.S. hotels, in S&P's view. Basham says S&P's outlook for 2009, which sees continued weakness, could deteriorate even further due to the negative effect of flight reductions planned by many airlines. S&P expects the net supply of rooms to grow in 2008 by 2.2% to 2.3%, owing to new construction and redevelopment projects already started. Looking to 2009, more stringent lending standards may result in developers failing to bring as many rooms onto the market as they currently expect.

Low Room Occupancy

S&P anticipates a decline in average room-occupancy rates in 2008, with occupancy likely to dip slightly below the low end of the average historical range of 60% to 65%. Annual occupancy below this range is indicative of a recession, in S&P's view. Although occupancy rates are being aided by relatively prudent supply additions in the prior five years, compared with past cycles, at the current pace of new supply being developed, risks are to the downside, by S&P's analysis.

S&P also thinks tighter lending standards are likely to have a negative effect on the residential vacation and ownership markets, according to Basham. S&P believes current credit conditions will lower demand for whole and fractional ownership as well as time-share properties. Also, while asset securitizations of timeshare receivables are still likely to occur, S&P thinks the market will demand higher rates. Notes Basham, "We think prolonged credit market distress will further dampen this important source of capital for the vacation ownership market." As for cruise ship travel, S&P is concerned that for the remainder of 2008, consumer demand may be dampened by generally slower U.S. economic growth. However, Basham says the delivery of newer ships to the primary industry operators, and increased foreign bookings, particularly by European vacationers, should bolster industry operating performance.

So there you have it: The group's weak relative strength is confirmed by a negative outlook.

Industry momentum list update

Here is this week's list of the industries in the S&P 1500 with Relative Strength rankings of 5 (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500 index), along with a stock that has the highest S&P STARS (tie goes to the issue with the largest market value).

Subindustry Company Ticker S&P STARS Rank Price (8/22/08)

Biotechnology Genzyme GENZ 5 $80

Brewers Molson Coors TAP 4 $48

Coal & Consumable Fuels Peabody Energy BTU 4 $65

Education Services Apollo Group APOL 3 $65

Fertilizers & Agr. Chem. Monsanto MON 5 $118

Health Care Equipment Becton, Dickinson BDX 5 $88

HyperMarkets & Super Centers Wal-Mart WMT 4 $59

Industrial Gases Airgas ARG 5 $59

Life Sciences Tools Covance CVD 5 $96

Oil & Gas Drilling Noble NE 5 $51

Oil & Gas Equip. & Svcs. Superior Energy SPN 5 $47

Oil & Gas E&P Swift Energy SFY 5 $48

Personal Products Avon Products AVP 3 $43

Railroads Norfolk Southern NSC 4 $71

Source: Standard & Poor's Equity Research


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