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Summer Stock Plays

CNBC.com
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American travelers have several forces working against them this summer: gasoline prices and airfares are on the rise, while vacationing overseas will be a lot more expensive given the sagging dollar.

While those factors may keep some folks closer to home, analysts say the weak greenback may actually benefit some lodging and leisure companies this season. More consumers are expected to fill hotels and resorts at home, while foreigners should flock to the U.S. to take advantage of what, at least for many Europeans, equates to a 30% discount.

“Despite gas prices, families will vacation this summer,” said Eileen Ogintz, author of the “Taking the Kids” series of travel guides. “Some may vacation closer to home. Some may fly, but they won’t give up vacation – it’s too important to them.”

In fact, a record 209 million passengers are expected to fly from June through August, up about 3% from last summer.

Here's a look at some vacation-themed plays.

Airlines

Airlines do the majority of their business during the warmer months -- specifically the third quarter – and demand projections appear to be slightly higher than last year.

“Expect a spring time rally shortly, or as soon as the markets realize demand remains strong and price increases will be up better-than-expected,” said Ray Neidl, airline analyst at Calyon Securities. “However, higher oil prices remain a major threat. Right now, airline stock prices are moving on oil price changes.”

Still, even if jet fuel were to rise about 10%, it wouldn't cause a great deal of turbulence, says Bob McAdoo, airline analyst at Prudential Equity Group. That's because jet fuel accounts for about 30% of airlines' total costs, so a 10% jump in fuel expenses would bring total costs up about 3% or 4%, he explains.

"A 3% to 4% fare increase will cover a lot of this stuff. The average domestic fare is about $120 so an extra 3% or 5% is about $5, so it's not enough to scare people. They'll spend that on Starbucks waiting in the airport."

His favorites include Continental , AMR’s American Airlines and US Airways .

Others aren’t so optimistic. Todd Burchett, portfolio manager of the Icon Industrials Fund, says that while some airlines may look like good buys at the moment, he doesn't expect them to take off.

“They are on sale, but we’d like to see strength and leadership before investing in (the sector),” says Burchett, whose $101 million fund strictly relies on quantitative measures to select stocks that are trading at a discount but that illustrate "leadership" qualities that could drive the stock higher.

Hotel and Casino Outlook

Leisure, Gaming & Resorts

Fewer travelers visit Las Vegas during its hot summer, but it’s an important season for regional casinos and resorts.

“It’s pretty critical,” said Joel Simkins, gaming and leisure analyst with Prudential Equity Group. “Regional operators haven’t seen any meaningful impact from rising gas prices at this point. Last June, we had a massive increase in gas prices and it was a bit of a shell shock to consumers. As long as nothing radical (happens) compared with last year, most consumers have gotten used to the situation.”

One of his top picks is Penn National Gaming , a casino operator based in Wyomissing, Penn., with 16 casinos.

Another factor that has kept Simkins relatively positive on the leisure sector: the weak dollar. “If a room rate is $350 a night, that is pretty cheap for folks coming in form the U.K.,” Simkins added.

He also likes Steiner Leisure , which operates the spas on cruise ships, including Carnival and Royal Caribbean, as well as other destinations such as the Atlantis resort on Paradise Island. The company has very little debt, a lot of cash on its balance sheet, and its shares are trading at less than 15 times his 2008 earnings projections, Simkins said. “They will benefit from the roughly 27 cruise ships coming on line between now and 2011,” he added. “It’s an alternative way to play the long-term growth of the cruise industry.”

Hotels

Though shares of hotels have skyrocketed in recent years on the back of the strong economy, several analysts and investors are still upbeat on the sector given a healthy balance between supply and demand.

"Supply is fairly modest and demand has been healthy,” said Robert LaFleur, gaming, lodging and leisure analyst at Susquehanna Financial Group. “Pricing power is still pretty significant but it has eased in the past year or so."

His top picks include Starwood , Hilton and Marriott ; he says they’re well positioned in the current environment, while Starwood and Hilton have been very aggressive overseas, which has worked out quite well.

Harry Curtis, hotel analyst at JPMorgan, said he expects the supply of upscale hotel rooms to increase less than 2%, as rising construction costs and condo conversions cap new room growth. Room rates should continue to rise, as should occupancy levels. As long as the economy grows above 2%, he said in a research note, shares of several hotel companies should rise 20% to 40% over the next year to 18 months.