With the Great Recession all but a faded memory and summer rapidly approaching, staycations are out and vacations are in!
Almost 80% of individuals contacted plan to take at least one weekend trip in 2017 and nearly two-thirds of them plan to travel more than 150 miles from home, according to a 12/21 survey by Enterprise Holdings.
Fun-related industries have had some of the best performances so far this year.
S&P 500 Casinos & Gaming is the best-performing industry, up 42.7% ytd, while S&P 500 Hotels, Resorts & Cruise Lines has risen 25.2%, and S&P 500 Restaurants is up 14.9%.
This implies that consumers are spending, just not at the mall.
Strong Q1 earnings results out of some of the largest names in the travel industry drove home the strength in the market.
Let’s look at the results out of Royal Caribbean, Marriott International, and Disney:
(1) Smooth sailing. Royal Caribbean Cruises beat Q1 earnings expectations, and management boosted the company’s 2017 forecast, saying its ships are booking up faster than last year, yields came in better than expected, and costs were lower than expected.
CEO Richard Fain spoke a bit about how consumer demand had evolved during the company’s Q1 conference call. A few years ago, if you asked consumers what they wanted, they might have said a flat-screen TV or a better car. Now people prefer to spend time with family, doing things that will make lasting memories. “I do think that [this is] somewhat of a culture shift and I think we’re benefitting from that,” said Fain. This trend has increased demand for vacations that include multiple generations of families, and it has boosted demand for excursions on cruises.
Royal Caribbean is also benefitting from the wanderlust of the rapidly expanding Chinese middle class, which will be bigger than the entire population of the US or Europe within the next few years. Right now, business in China is challenged by that county’s directive to cruise operators to stop selling trips that stop at South Korea. Tensions between the two countries rose after South Korea deployed a US missile defense system. Royal Caribbean redirected its ships to Japan, and any Q1 weakness in China was offset by strength in Europe and elsewhere.
The cruise operator said adjusted net income rose 73.1% y/y to $214.7 million and EPS rose to 99 cents, up from 57 cents and nine cents higher than the company’s guidance. The company lifted its full-year EPS estimate by 10 cents to $7.00-$7.20. It also announced a new $500 million stock repurchase program.
Shares of Royal Caribbean and other cruise operators also have benefitted from rumors that China’s HNA Group might be interested in buying a major cruise line, according to a 5/1 report in Cruise Industry News. HNA, which has a cruise brand in China, purchased a 16.8% stake in Dufry, which runs duty-free shops around the world, and purchased a stake in Rio’s airport last month.
Investors will need to watch how expanding capacity in the industry from newly built ships being delivered in the next few years is absorbed. As of December, 26 new ocean and river cruise ships were on order, followed by another 17 ordered for 2018 and 22 for 2019, according to the State of the Cruise Industry published by the Cruise Lines International Association. But for the moment anyway, investors should enjoy these halcyon days.
(2) No room at the inn. Marriott also reported stronger-than-expected Q1 earnings and increased future earnings guidance. The company credited its strong performance to more customers staying at its hotels, higher room rates, more hotel rooms in its system, and a late Easter.
Marriott’s worldwide revenue per available room (RevPAR) in constant dollars rose 3.1% in Q1. The gain is impressive given that the company added more than 17,000 rooms in the quarter. It also increased its development pipeline by nearly 10,000 rooms. Q1 adjusted net income was $395 million, a 36% increase assuming the September merger with Starwood occurred at the start of 2015 and excluding merger costs. Adjusted EPS jumped 38% to $1.01, above the company’s 87-91 cent guidance.
Marriott increased its expectations for 2017 RevPAR in the US, Europe, and Asia. However, it left expectations unchanged in the Middle East, where geopolitical unrest, low oil prices, and lower government spending continued to depress results. All in all, the company increased its 2017 worldwide RevPAR estimate by 50bps from its previous guidance to 1%-3%. Company shares rose 6.4% in the wake of the report.
Similar to the cruise industry, the future of the hotel industry rides on whether demand will keep up with new supply. There are 560,199 US hotel rooms in 4,621 projects under construction or in planning stages as of December, a 19.4% y/y increase in the number of rooms, according to a 1/16 article in HotelNewsResource.com.
(3) Happiest place on earth. Weakness at ESPN may have captured the headlines about Disney’s fiscal Q2 earnings, but the strength at the company’s theme parks saved the day. Revenue at the parks increased 9% to $4.3 billion, and operating income jumped 20% to $750 million. Results were helped by a 4% increase in attendance at the US parks and the opening of Shanghai Disney last year, the company reported.
(4) By the numbers. Hotels, Resorts & Cruise Lines has been one of the S&P 500’s top-performing industries, gaining 25.2% ytd through Tuesday’s close (Fig. 1). The industry has outperformed each of the S&P 500’s sectors, including Technology.
Here is how the sectors have fared ytd: Tech (17.1%), Consumer Discretionary (11.6), Health Care (9.6), S&P 500 (7.1), Industrials (6.6), Consumer Staples (6.2), Materials (5.7), Utilities (5.3), Real Estate (2.0), Financials (1.7), Telecom (-10.6), and Energy (-10.8) (Table).
The Hotels, Resorts, & Cruise Lines industry (CCL, MAR, RCL, and WYN) is expected to grow revenue 9.6% over the next 12 months and earnings 13.7% (Fig. 2). The industry’s forward P/E of 17.1 is modestly below a recent peak of 22.2 in 2013 (Fig. 3).
The S&P 500 Casinos & Gaming industry, which counts Wynn Resorts (WYNN) as its sole member, has enjoyed a revival thanks to booming business in Las Vegas and Macau. Macau’s gross gambling revenue was up 18% in March, continuing a recovery that began last August. The Casinos & Gaming industry is expected to grow revenue 17.4% over the next 12 months and earnings 30.2% (Fig. 4). Its forward P/E, at 24.5, is less than its anticipated earnings growth over the same period (Fig. 5).
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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