Is the Marriott (NASDAQ: MAR) Rally Sustainable?

The travel industry has been decimated by COVID-19, with airlines and hotels bearing the brunt of the damage. Marriott NASDAQ: MAR shares were changing hands for around $140-150 during the first two months of 2020, before pandemic fears sent shares plunging to less than $50 in March. Shares quickly recovered, but struggled to stay above $100… Until the Pfizer NYSE: PFE vaccine news came out.

Marriott shares surged on the news; at one point, they were up more than 26%. Those gains didn’t last, but shares still closed up more than 13% for the day. Not bad.

The vaccine fueled move makes sense as the end of the pandemic will mark the end of lockdowns and social distancing requirements. Travel will come back and more people will start staying in hotels.

The business will be better for Marriott in 2021 than 2020. That’s not up for debate. But the more important question is:

How will business be compared to 2019?

Marriott shares are down just 15.3% YTD, so investment at current levels only makes sense if you think that Marriott’s revenue and earnings will approach 2019 levels in 2021 or 2022.

A Tough Road Ahead for Business Travel

2020 has been a year of upheaval in a lot of respects. One of the biggest changes has the shift from office work to remote work, and all that it entails. Meetings have been replaced by Zoom NASDAQ: ZM calls. Conferences have gone virtual.

Pre-pandemic, many corporations would have struggled to imagine a world without in-person events – and by extension, business travel. 9+ months later, it has turned into the norm. In-person corporate events will come back post-pandemic, but will they come back in the same quantity as before?

It’s unlikely that they recover anytime soon. There are a lot of struggling companies; they aren’t anxious to shell out thousands of dollars for unnecessary expenses. In the long run, it’s hard to see a full recovery because of the proliferation of video conferences. Even if business travel returns to 80-90% of pre-pandemic levels – which may be a bit optimistic – that means 10-20% less business customers for Marriott.

Domestic Leisure Travel Faces an Easier Road

Domestic leisure travel is the type of travel that is most likely to see a strong recovery in 2021. A lot of people are tired of being couped up in their houses and are way overdue for a vacation. There could be some pent up demand, and domestic leisure travel could exceed 2019 levels in 2021.

A lot of those travelers will opt to stay at Marriott hotels.

But There’s a Problem for Both Business & Leisure Travel

That problem is international travel. It isn’t much of an issue in North America; according to Marriott, “95% of room nights in 2019 were sourced from domestic travelers” in North America.

But in Europe, international travelers have historically accounted for around 40% of room nights. In Caribbean and Latin America, that number is approximately 60%. And in the Middle East and Africa, “international guests have historically made up around 50% of room nights.”

Many countries are not even close to opening up to travelers. Assuming that a vaccine is widely distributed by the summer, it’s still hard to imagine that those countries will rush to open their borders up to travelers. Effective and efficient systems will take time to implement, and if there’s anything we’ve learned in 2020, it’s that many governments are not effective and efficient.

On top of that, a large percentage of people are going to be apprehensive about traveling internationally. Virus fears will linger for a while – in some capacity – and people could be nervous about getting stuck somewhere after all the horror stories of 2020.

To be clear: the “international” problem won’t be a long-term problem for Marriott. But it’s just one more obstacle in the way of a 2021 recovery.

How Should You Play Marriott?

It’s tough to justify a Marriott investment right now, but that’s because expectations have gotten too optimistic. This is still an excellent company that has handled an extremely difficult operating environment about as well as you could expect.

Marriott, in spite of a 57% yoy revenue drop, actually turned an (adjusted) profit in the third quarter. It was only 6 cents per share, but that’s something, and it beat expectations of an 8 cents per share loss.

There’s a good chance that investors will be disappointed with Marriott’s performance in 2021. If so, they could all decide to rush to the exits around the same time. If that happens, shares could get oversold, providing you with a potential buying opportunity.