How important is the global travel and tourism industry? It’s a sector that accounts for about 10% of the world’s adult workforce. That’s 350 million people. The industry also accounts for at least 4% of the global gross domestic product (GDP).
In short, it’s an industry that accounts for trillions of dollars for the economy. And it relies on the most visible workers like pilots and cruise ship captains to the kitchen and housecleaning staff and servers. The travel industry is in many ways a service industry. But when there’s nobody to service, these businesses take a tumble.
And tumble it has. The world is going through a period of enforced social distancing. Many countries are taking even more extreme measures to lock down parts, or all, of their countries in an effort to contain the spread of the coronavirus and to flatten the curve to prevent healthcare workers and hospitals from being overwhelmed.
But that means fewer people are flying. Planned vacations are being canceled. And all of this is bad news for a sector that relies on the mobility of global travelers.
To be fair, the best of these companies should recover just fine. However, some of these companies had fundamental concerns that will be magnified by the loss of revenue.
Quick Links
- American Airlines
- Marriott
- Hilton Hotels
- Boyd Gaming Corporation
- Carnival Cruise Lines
#1 - American Airlines (NASDAQ:AAL)
Year-to-Date Loss: 63%
American Airlines (NASDAQ:AAL) entered 2020 with $29.6 billion of adjusted net debt on its balance sheet. That represents 65% of the company’s 2019 revenue. Of the major airlines, American is the one that can least afford to go further into debt. Yet, that’s exactly what is likely to happen.
Airlines for America, a trade group that represents the industry, has requested a $50 billion loan package from the U.S. government. While there is some posturing in Congress about “bailing out” the airlines, it is likely that the industry will receive some form of stimulus.
But if American Airlines receives a loan, they are going to be the hardest pressed to pay it back. This means that AAL’s path to a profit may take significantly longer than airlines with less debt heading into the crisis.
American has responded to critics of its debt to say that it has $7.3 billion in liquidity, more than any other airline in the world. However, they also have more debt and the highest debt load relative to the company’s underlying profits.
Plus, American Airlines made a tactical error in widely underestimating the lack of demand for its flights. On March 10, CEO Doug Parker provided guidance that the airline would reduce domestic capacity by 7.5% in April and international flights by at least 10% through the summer.
However, that turned out to be a far too conservative estimate. The management of the airline has been forced to walk that statement back and announce a 30% cut in domestic flights and a 75% reduction in international flights in April with likely deeper reductions in both during May.
That’s not the kind of downward revision that investors appreciate. Particularly when American, like other airlines is drawing the ire of investors and Congress with its share buybacks. Between July 2014 and the end of 2019, American spend $12.4 billion buying back its own stock.
About American Airlines Group
American Airlines Group Inc, through its subsidiaries, operates as a network air carrier. The company provides scheduled air transportation services for passengers and cargo through its hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix, and Washington, DC, as well as through partner gateways in London, Doha, Madrid, Seattle/Tacoma, Sydney, and Tokyo.
Read More - Current Price
- $14.46
- Consensus Rating
- Hold
- Ratings Breakdown
- 6 Buy Ratings, 10 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $13.96 (3.4% Downside)
#2 - Marriott (NASDAQ:MAR)
Year-to-Date Loss: 50%
For many of the reasons I was high on Marriott (NASDAQ:MAR) stock at the beginning of the year have gone by the wayside. Your views on Marriott stock really depend on how optimistic you are about the company, and the industry, coming out of this coronavirus-induced slowdown.
According to J.P. Morgan Chase, U.S. hotel revenues per available room have declined more than 30% relative to their pre-virus status as of March 14. That decline is almost sure to accelerate before it reverses.
Marriott has a silver lining in that it does not own a high percentage of the properties that bear its brand name. It’s an asset-light approach that gives some investors reason to believe that Marriot will be able to withstand this turbulent period.
And I do think Marriott has taken the right, if not unpopular steps, to cut expenses. First of all, Marriott recently announced major layoffs. Many of these jobs simply won’t be coming back. Second, nobody knows exactly when the company will be ready to bring those jobs back.
And, although moves like this tend to be more symbolic, Marriott CEO Arne Sorenson will not take a salary for the remainder of the year. Sorenson also announced that top executive will take a 50% pay cut for the rest of the year.
And like the airline industry, it’s likely that the hotel industry (and by extension Marriott) will receive stimulus funds. All of that points to the idea that Marriott does not appear to be in danger of bankruptcy.
But the question is will demand come back? Marriott relies heavily on business travel. I’m not sure if that is coming back any time soon. As more employees experience the forced reality of working from home, it’s likely that the world will become even smaller than it already is. It’s likely that we could be heading into a period where companies begin to isolate within their borders like never before. And Marriott will have to cut its dividend. This makes it less appealing from a value perspective.
About Marriott International
Marriott International, Inc engages in operating, franchising, and licensing hotel, residential, timeshare, and other lodging properties worldwide. It operates its properties under the JW Marriott, The Ritz-Carlton, The Luxury Collection, W Hotels, St. Regis, EDITION, Bvlgari, Marriott Hotels, Sheraton, Westin, Autograph Collection, Renaissance Hotels, Le Méridien, Delta Hotels by Marriott, Tribute Portfolio, Gaylord Hotels, Design Hotels, Marriott Executive Apartments, Apartments by Marriott Bonvoy, Courtyard by Marriott, Fairfield by Marriott, Residence Inn by Marriott, SpringHill Suites by Marriott, Four Points by Sheraton, TownePlace Suites by Marriott, Aloft Hotels, AC Hotels by Marriott, Moxy Hotels, Element Hotels, Protea Hotels by Marriott, City Express by Marriott, and St.
Read More - Current Price
- $280.18
- Consensus Rating
- Hold
- Ratings Breakdown
- 6 Buy Ratings, 13 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $259.00 (7.6% Downside)
#3 - Hilton Hotels (NYSE:HLT)
Year-to-Date Loss: 44%
The story for Hilton Hotels (NYSE:HLT) is virtually identical to Marriott. Which makes the prediction for the stock about the same. Hilton, like Marriott, takes an asset-light approach. That means Hilton does not actually own most of the hotels that bear its name.
One of the ways Hilton has added value for its shareholders is through an aggressive stock buyback program. In 2019 alone, the company bought back 16.9 million shares ($1.5 billion). In the three years the company has been buying back shares, it has repurchased approximately $4.3 billion worth of stock.
Earlier this year, HLT’s board authorized a non-binding buyback of an additional $2 billion in shares. However, the company noted that it is not obligated to repurchase a specific dollar amount and may suspend or discontinue the program at any time.
In October 2019, Hilton president and CEO Christopher Nassetta said of the buybacks, “I think our strategy on how we want to return free cash flow that we don’t need to grow the business to shareholders in the form of a modest dividend but a lot of buybacks over time is the right strategy. We’re going to stick with it.”
That was then. As Congress debates a stimulus package for the industry, companies that have instituted stock buyback companies are in the crosshairs. Ultimately, it won’t change much, but it will make the idea of a buyback unpalatable. At least for this year.
But like Marriott, it’s hard to see a reason to buy HLT stock without a clear idea of what the new normal will be and when that new normal will start.
About Hilton Worldwide
Hilton Worldwide Holdings Inc, a hospitality company, engages in managing, franchising, owning, and leasing hotels and resorts. It operates through two segments, Management and Franchise, and Ownership. The company engages in the hotel management and licensing of its brands. It operates luxury hotels under the Waldorf Astoria Hotels & Resorts, LXR Hotels & Resorts, and Conrad Hotels & Resorts brand; lifestyle hotels under the Canopy by Hilton, Curio Collection by Hilton, Tapestry Collection by Hilton, Tempo by Hilton, and Motto by Hilton brand; full service hotels under the Signia by Hilton, Hilton Hotels & Resorts, and DoubleTree by Hilton brand; service hotels under the Hilton Garden Inn, Hampton by Hilton, and Tru by Hilton brand; all-suite hotels under the Embassy Suites by Hilton, Homewood Suites by Hilton, and Home2 Suites by Hilton brand; and economy hotel under the Spark by Hilton brand, as well as Hilton Grand Vacations.
Read More - Current Price
- $250.14
- Consensus Rating
- Hold
- Ratings Breakdown
- 8 Buy Ratings, 11 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $228.71 (8.6% Downside)
#4 - Boyd Gaming Corporation (NYSE:BYD)
Year-to-Date Loss: 60%
As it turns out, what happens in Vegas, may not stay in Vegas. That’s the reason casinos have shut their doors to comply with mandates for social distancing. And like the other companies in this presentation, Boyd Gaming (NYSE:BYD) appears to be less positioned to be profitable on the other side of this.
One of the first things investors are looking at is the health of the company prior to the government’s aggressive response to the coronavirus. And if you don’t look too closely, you’d see that Boyd beat on both earnings and revenue. And as we entered 2019, the casino industry continued to grow at a modest pace.
I’m looking at two things. At the end of 2019, Boyd’s earnings report listed the company’s cash on hand as being $250 million. The company had total long-term debt of $3.81 billion.
However, the company’s revenue for all of 2019 was $3.33 billion. There’s no telling how low this number will drop in 2020 and the company has wisely pulled its guidance until it can get clarity. And in fairness, only a fraction of the company’s long-term debt will be due in 2020. However, with revenue being down and only $250 million of cash on hand profit will be hard to come by.
Plus, it appears more likely that the company will be receiving stimulus funds from the government. The terms of this stimulus will be very important. If it comes to the companies as a loan, the way Treasury Secretary Mnuchin envisions, than the companies will have to pay it back. If, however, it becomes more of a bailout, that could change the calculus for Boyd and other casino companies.
I have little doubt that the casino industry will return to business as usual once the virus fears ease. Although the industry carries many of the same health risks as, say, a cruise ship, you don’t hear the outcry of casinos being “petri dishes” for germs. The casino industry features the double whammy of crowded spaces combined with high touch surfaces. This makes them prime spaces for the spread of a virus. Unfortunately, Boyd Gaming has an additional hurdle to clear than just customer confidence.
About Boyd Gaming
Boyd Gaming Corporation, together with its subsidiaries, operates as a multi-jurisdictional gaming company in Nevada, Illinois, Indiana, Iowa, Kansas, Louisiana, Mississippi, Missouri, Ohio, and Pennsylvania. The company operates through Las Vegas Locals, Downtown Las Vegas, Midwest & South, and Online segments.
Read More - Current Price
- $71.76
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 7 Buy Ratings, 7 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $91.38 (27.3% Upside)
#5 - Carnival Cruise Lines (NYSE:CCL)
Year-to-Date Loss: 77%
I never realized the “anti-cruise” crowd could be so vocal. But ever since the coronavirus broke out on two of Carnival Cruise Lines (NYSE:CCL) ships, consumers who have never taken a cruise are taking their victory lap. And joining them is the crowd who are vowing never to cruise again.
The financial problem for Carnival is equally as important as its public relations challenge. The company’s net debt is currently over 96% of the company’s current value. However, that same debt is less than 25% of its total assets. But when you consider that the bulk of the company’s assets are tied up in their ships, it’s hard to get a clear picture.
Undoubtedly, the company will have to suspend or significantly cut its dividend. And considering the company will probably be a recipient of some form of government stimulus, share buybacks will be discontinued. That money can help offset the company’s decline in revenue. But the real problem is nobody knows how much revenue the company could have to replace.
Am I picking on CCL at the expense of other cruise lines? Perhaps. They all face difficult math. But Carnival’s name is associated with the coronavirus in a very specific way. Is that fair? No, but life is frequently not fair. How the company responds to the public relations fallout will be every bit as important as how they navigate the financial side.
However, with every ship from every cruise line currently in port for the foreseeable future, there is no reason to own Carnival stock right now.
About Carnival Co. &
Carnival Corporation & plc engages in the provision of leisure travel services in North America, Australia, Europe, Asia, and internationally. The company operates through four segments: NAA Cruise Operations, Europe Cruise Operations, Cruise Support, and Tour and Other. It operates port destinations, private islands, and a solar park, as well as owns and operates hotels, lodges, glass-domed railcars, and motor coaches.
Read More - Current Price
- $25.09
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 14 Buy Ratings, 2 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $23.78 (5.2% Downside)
On the one hand, people say the sector has been here before. In fact, twice in the last 20 years, the industry has dealt with major events that have damaged consumer confidence, if not their disposable income.
And in both cases, the industry has come back stronger than before. This time it feels different. In fact, the coronavirus feels like it’s making a direct assault on the industry itself. But as difficult as it to see, the economy will come back.
In the meantime, the industry will almost certainly be kept afloat by some form of government stimulus. As unpalatable as that may seem, this is a sector that has become too important to fail.
But when it does, some companies will be in a far better position than others. And that’s why we wanted to show you these companies that have some challenges even before the coronavirus. That will make it harder for them to become profitable any time soon.
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