There was a great deal of talk on travel stocks this year. Many new, young investors targeted hard-hit cruise ship and airline stocks, jumping at the chance to buy cheap shares after the COVID-19 pandemic hit.
Going into January, we are going to have a clearer picture on the progress of vaccinations, and how the holidays affected case counts. As those vaccinations begin and progress, it’s going to set up the potential for travel and destination stocks to start getting a better sales environment. Here are two stocks worth watching in January.
The king of parks
Disney (NYSE:DIS) is a travel/destination company in the sense that a big piece of its business is based on travel and tourism to its theme parks. That part of Disney’s business has faced a tough environment.
But what makes Disney appealing is its incredible growth in streaming video. Recent success with Disney+ should give the company an ability to find growth in the near term while working to get parks up and running at full performance once COVID-19 is under control.
Disney’s revenues from parks and attractions have cratered through 2020, due to park closures and limited capacity for those that have opened. Segment sales plunged a colossal 37% to $16.5 billion for the fiscal year ended on Oct. 3. Yet elsewhere within the company, Disney’s direct-to-consumer business is taking off faster than many anticipated. Revenues for this segment, which includes streaming, increased 81% for the fiscal year to $16.97 billion.
Image source: Getty Images
Yet while Disney is creating big sales gains in its direct-to-consumer businesses, the segment isn’t profitable. Disney reported an operating loss of $2.8 billion for the direct-to-consumer segment for fiscal 2020. The company announced in October that it was increasing its focus on streaming even more, making Disney a focal point for investors in one of the fastest-growing industries. It also comes with some short-term pitfalls, as it can be an expensive business. This has been demonstrated by how long it took Netflix to create positive cash flow, and the increasing operating losses that Disney’s direct-to-consumer segment is creating.
Disney’s foray into a growth-focused industry like streaming is leading investors to view it a little differently. Even as the company reported losses, and continued weakness on the parks side of things, shares erased all of the year’s declines.
I think there is a springboard waiting for Disney shares. Streaming revenues are driving the stock. If the parks side of the business can come back into play, and provide more operating income, Disney’s momentum will take off.
The middleman
Rather than going after a particular hotel or airline, it’s not a bad idea to look for a name that can benefit from all of them. The online travel agencies that cover bookings of air travel and hotels are an excellent tactic for getting exposure to this industry. Some reports have suggested that this online booking market could grow by $204.1 billion over the next four years.
Overall, I like Expedia (NASDAQ:EXPE) in this space. As an operator of travel services like Trivago and Hotels.com, Expedia is up over 30% in the last three months. Earnings have by no means returned to what they were pre-pandemic, and the holidays are likely to send us a big jump in COVID-19 cases going into the start of January. That obviously won’t be a welcome thing for travel stocks, but after that, continued vaccinations will set the stage for an ever-improving environment for travel.
Expedia is a nice option compared to investing directly in airlines like Southwest or Delta Air Lines. How each individual airline or hotel chain will do in a recovery is a lot less predictable. Expedia’s ticket sales and bookings make it a more diversified approach.
Coming into 2020, Expedia had looked strong. Free cash flow rose 46.5% increase in 2019, and earnings climbed nearly 42% to $3.77 per diluted share. That gives a sense of what Expedia could look like after a full recovery.
The main reason I think Expedia warrants watching in January is that the rising COVID-19 caseload and potential disappointment on the vaccine front could give investors a better buying point. That’s consistent with Citi Research analyst Jason Bazinet’s views. He recently downgraded the stock, as he sees travel being potentially vulnerable to a “spottier” vaccine distribution. Citi also believes that business travel may be “permanently impaired.”
I see a lot of overly enthusiastic views about vaccinations. Production and distribution of vaccines will take time. It’s not going to reconcile the effect that holiday travel and socializing could have on case counts in the near term.
When you’re looking for investments, Disney is a company offering a strong spot within streaming, which will only get better once parks get back on track. Expedia is essentially a diversified play on the travel industry, without having to commit to a single player.
