Travel demand is hot, but some prices may cool: These are the stocks for spring break and beyond

Published Sat, Feb 18 20238:04 AM EST

Even after months of soaring inflation, Americans are still packing their bags and taking trips. With the spring break season fast approaching, that is good news for travel companies. "Demand remains strong as passengers return to the skies and industry returns to the long-term trend to GDP, all while supply constraints continue," Delta Air Lines CEO Ed Bastian said on the company's fourth-quarter earnings call in January. "I believe our industry will see tens of billions of dollars of incremental demand in the next few years coming out of the pandemic." And it's not just airlines. Last week, Hilton Worldwide CEO Chris Nassetta said, "The demand trends here and now are really strong." The hotel operator reported better-than-expected earnings and revenue growth in the fourth quarter. In the home-rental space, Airbnb also said it was seeing continued strong demand at the start of 2023. The company also reported a fourth-quarter earnings and revenue beat earlier this week. "Global travel has really rallied this year; it's outpacing the broader market," said Sylvia Jablonski, CEO and chief investment officer of Defiance ETFs. The firm has a travel exchange-traded fund (CRUZ) that invests in airline, hotel and cruise stocks. The ETF has a total return of nearly 21% year to date, as of Feb. 16, according to Morningstar. In comparison, the S & P 500 has gained about 6% so far this year. CRUZ YTD mountain CRUZ's year-to-date performance "The consumer is still spending, and they're spending more in services and experiences than they are in goods," Jablonski added. "The inflation is also there. So those companies are benefiting from having that pricing power and having the consumer that can actually spend." China's reopening from its Covid lockdown is also helping propel travel demand, as well as the tick up in business travel, she said. Pricing pressures Yet there are some nuances. Short-term vacation rentals aren't growing as fast as they once were. Short-term rental analytics site AirDNA is forecasting a 5.5% increase in demand this year, compared with an estimated 21.1% gain in 2022. Airbnb's most recent results bear that out. On a constant-currency basis, the company's average daily rates for the fourth quarter were up 5% year over year. That's less than the 12% third-quarter growth and 20% surge it enjoyed in the same period the year prior. "For the remainder of the year, we expect [average daily rates] will face increasing downward pressure from mix shift, as well as new and improved pricing and discounting tools," Airbnb's management said in its shareholder letter . Several Wall Street analysts voiced some concern about the stock. The shares have made impressive gains since the start of this year, climbing nearly 54%. But the stock pulled back on Friday, dropping 8%. "Risks include competition, slower-than-expected consumer adoption of alternative accommodations, potential reacceleration in core short- term stays, and faster-than-expected rollout of ancillary revenue streams," Credit Suisse analyst Stephen Ju wrote in a note Wednesday. JPMorgan analyst Doug Anmuth noted Airbnb's potential image issues. "Airbnb is built on the concept of trust, so negative behaviors of hosts and/or guests could negatively affect Airbnb's reputation and public perception," he wrote in a note Wednesday. The easing in price growth is also being seen in Vrbo. Expedia , its parent, said it has seen "a little bit of movement in Vrbo" pricing, despite strength everywhere else. The company, which missed on earnings and revenue for the fourth quarter, pointed out that Vrbo is coming off really high levels. Expedia said its earnings results were affected by cancellations due to bad weather, like Hurricane Ian last fall and December's winter storms. CEO Peter Kern told CNBC's "Tech Check" last week that the company has seen lodging gross bookings grow by 20% in January. "The trends have been really strong since January," he said. "There's just been a ton of demand." A different story with hotels At the same time vacation rentals are seeing pricing pressure, hotel room rates continue to move higher. "We went from this period of lagging pre-Covid levels and we've seen a pretty drastic and significant acceleration," said Rene Reyna, head of thematic and specialty product strategy for Invesco. The Invesco Dynamic Leisure and Entertainment ETF (PEJ) is currently composed of about 10% airline stocks, 30% restaurants, 40% hotels, casinos and booking, and 20% entertainment and streaming, he said. In addition to Hilton, Hyatt , Wyndham and Marriott all topped Wall Street's expectations in their most recent financial reports. Hyatt saw its fourth-quarter revenue per available room (RevPAR), a key performance metric, grow by 34.8% from the same period in the prior year. It was even higher than pre-pandemic levels, up 2.4% versus the fourth quarter of 2019. On an annual basis, RevPAR rose 60.2% in 2022 compared with 2021, but was down 6.1% for the full year compared with 2019. Wyndham's fourth-quarter global RevPAR grew 15% the year-ago period in constant currency, and was up 20% year over year. Meanwhile, Marriott's worldwide RevPAR grew 5% compared with 2019, driven by a 13% increase in the average daily rate. "With the exception of Greater China, RevPAR in all regions more than fully recovered and continued to show meaningful advances in occupancy and ADR," said Marriott CEO Anthony Capuano in a statement. Defiance's Jablonski likes Marriott for its strong balance sheet, good management and numerous properties. "They benefit from everything from higher-end, luxury consumers and some of their more unique properties," she said. So why the divergence between hotels and short-term vacation rental platforms? Part of the answer may be that with people re-emerging from Covid isolation, the desire to vacation away from crowds may be fading. "Hotels have been making up ground and I think we're getting to a much more normalized level," Expedia CEO Kern said. "In omicron, everybody was keenly focused on going away but going somewhere safe. Now people are going back to resorts, back to anywhere, back to big cities," he added. "You're seeing some normalization there, but Vrbo is still much stronger than it was in 2019." Airlines taking off There has also been positive news coming from the airlines. According to the International Air Transport Association, the global airline industry should return to profitability this year. The group estimates airlines will earn $4.7 billion — the industry's first profits since 2019, when it earned $26.4 billion. Airlines like Delta, American Airlines and United Airlines cited strong travel demand and higher fares for fueling their strong fourth-quarter earnings — as well as for forecasts for this year. "We expect a strong demand environment to continue in 2023 and anticipate further improvement in demand for long-haul international travel this year," American Airlines CEO Robert Isom said during the earnings conference call in January. For Jablonski, Delta and United stand out as winners. "You have strong balance sheets, you have a reset in like staff and enough airplanes," she said. DAL YTD mountain Delta's year-to-date performance Rental car companies, on the other hand, haven't seen much movement in rates. Last week, Hertz said its revenue per day rose 3% year over year, and just 1% in the Americas region. Avis Budget 's Americas division saw a 3% year over year bump. Looking ahead Investors are now just watching and waiting to see what the Federal Reserve's next move is with interest rates and whether or not the U.S. goes into recession. "In the near term, we're seeing very positive results. And so you know, it's really the second half of the year, I think that's going to be challenging," said Invesco's Reyna. If a recession does hit sometime this year, it will impact companies differently, he noted. "There's very different types of consumers out there," he said. "Depending on what the sweet spot for consumers for some of these companies, I think it's really going to dictate how much of an impact inflation or recession can have on their businesses." Those that target a higher-end consumer may not feel much pain, he said. "In a challenging economic backdrop, this segment tends to be a little more resilient," he said. —CNBC's Robert Hum, Seema Mody and Michael Bloom contributed reporting.