Americans may be cutting back on their spending, but one thing they’re not willing to give up just yet is travel. As many retailers reported this earnings season, inflation-weary consumers have been less likely to pull out their wallets for discretionary purchases. This sentiment was echoed in a recent survey by KPMG, which found that consumers were expected to spend a smaller percentage of their monthly household budget in discretionary and essential categories this summer than in the winter of 2023. Expected to have the greatest experience in furniture, toys and hobby supplies. Spending declined, the survey found. Yet despite all the odds, 61% of those surveyed said they plan to travel this summer, while 49% said the same in the summer of 2021. of 1,003 consumers across the United States. “A large portion of this travel and vacation was taken away from them for a period of two to three years,” explained Matt Kramer, national sector leader for consumer and retail at KPMG. “They are reluctant to withhold experiences and events that they treasure.” This is translating into better performance in the travel sector to name a few. “You’ve certainly seen a lot of travel stocks benefit from consumer spending this year,” said Sylvia Jablonski, CEO and chief investment officer of Defense ETFs. The firm’s Airline, Hotel & Cruise ETF (CRUZ) is up nearly 12% so far in 2023, after losing 24% in 2022. For example, Royal Caribbean is up nearly 58% year to date after losing 35.72% in 2022. Carnival 2022 is up about 36% so far this year after losing about 60%. Online travel site Booking Holdings is also outperforming the broad market, up nearly 29% so far this year, and Marriott has added 15% this year. Meanwhile, United Airlines is up nearly 26%. Wise Travelers As consumer spending moves from goods to services, fueling the post-pandemic travel recovery, they are also getting wiser in the face of rising prices. “They’re just thinking about how they spend and where they actually book their accommodation,” Kramer said. “I think you’re going to see, just like in groceries, where consumers are willing to trade up for lesser brands or private labels, they will do the same with their travel planning.” In fact, according to a Morning Consult report on the state of travel and hospitality in the first half of 2023, travel is what travelers take into account the most when booking travel. Other options other than canceling the plans completely. Some 48% of the Morning Consult poll said they searched for cheaper alternatives, up from 46% in July 2022, while 38% canceled plans – down from 40% who canceled in July 2022. Then there is the effect of remote working, which has helped unlock travel demand. A separate survey conducted by Morning Consult for the American Hotel and Lodging Association found that 86% of business travelers are interested in extending a work trip for leisure purposes, known as “blazer” travel. Some 4,117 American adults were polled between April 28 and May 3. recovering after being shut down for more than a year during Covid and then dealing with myriad restrictions that kept travelers away, analysts at Bernstein wrote in a note to clients earlier this month. Cruise lines are now on track for the biggest recovery in travel this year. For example, price increases have not yet matched hotel rooms, meaning there is room for prices to rise further. Royal Caribbean stands out as a top pick for UBS analyst Robin Farley. He also has a buy rating on Carnival, but the company has more European travelers than Royal Caribbean. He said European consumers are not as strong as their North American counterparts. RCL 5Y Mountain Royal Caribbean 5-Year Performance In addition, about 64% of Royal Caribbean’s cruises are in the Caribbean, which is a very strong market. It includes a private island, There is also the CoCoCay, which has features such as a waterpark, zip lining, and hot air balloons that contribute to the Royal’s revenue. Farley raised his price target on the stock earlier this month from $91 to $103 per share, suggesting shares could rally 32% from Thursday’s close. Meanwhile, Citi analyst James Hardiman is bullish about the carnival. He upgraded the stock to buy from neutral on Thursday and raised his price target to $14 per share from $10, a 27% upside from Thursday’s close. CCL 5Y Mountain Carnival’s 5-year performance Carnival’s balance sheet is at a turning point, Hardiman said, with an opportunity to become “considerably ‘less ugly’ in the years to come.” He said the namesake Carnival brand is also seeing strength, which is early evidence that CEO Josh Weinstein’s turnaround story is working. Hotels are leading the way in recovering from the ‘improvement in every region of the world’ pandemic. According to the AHLA, average hotel occupancy is expected to reach 63.8% in 2023, down from 65.9% in 2019. According to hotel data company STR, prices are still climbing, though not as much as in 2022, when the industry’s average daily rate (ADR) and revenue per available room (RevPAR) were the highest for any year on record. In April 2023, ADR increased by 3.4% while RevPar increased by 1.9%. Despite those higher rates, there appears to be an increase in demand. Nearly 56% of adults are more likely to stay in a hotel this summer than in 2022, according to an AHLA/Morning Consult survey. Of those polled, 55% expected to take more frequent holiday trips and 52% planned to stay longer. That strength was also visible during the earnings reports of this season. “We saw improvements in every region of the world,” Marriott International CEO Tony Capuano told CNBC after its first-quarter earnings report earlier this month. That sentiment was echoed by Hilton Worldwide CEO Chris Nassetta, who told CNBC after the company posted an earnings decline in April that the hotel is seeing strength across all segments — leisure, business and meetings and events. He cited pent-up demand from business travelers and a secular shift in spending on experiences and travel over other discretionary purchases. Inbound international travel, which is at about half of 2019 levels, should also back up. Not only is China reopening, but the US Travel Association, which is chaired by Nasetta, is working with the Biden administration and the State Department to drastically reduce wait times for visas. “There is tremendous potential in international travel over the next six to 24 months,” he said. Hilton is UBS’ Farley’s top pick. “Hilton is a very low asset. … Most of their business is renting out their brand flagships and they showed how resilient they can be in the pandemic,” she said. “It’s a safe place to hide when there’s a downturn, because they’re mostly sharing the top line and they’re not capital intensive.” However, Jablonski of the Marriott Defense ETF has a favorite play. “Marriott is expanding. So they’ve expanded their occupancies, they’ve expanded their chain of hotels, their timeshare properties, their residential properties,” she said. “Their EPS has more than doubled in the last quarter and their revenue growth has also crossed double digits.” Online travel stock While Airbnb also beat earnings for the first quarter, its cautious outlook for the current quarter drove the stock lower earlier this month. CEO Brian Chesky told CNBC the caution is being exercised because of affordability pressures in North America. “With inflation, people are focusing more than ever on affordability,” he said in an interview with “Squawk on the Street.” “We’re really focused on trying to moderate prices in North America.” For Jablonski, the recent pullback makes the stock attractive. While Airbnb is up about 22% to date, it has lost about 18% as of Thursday’s close since reporting May 9 earnings. “The stock is fairly priced. They trade at eight and a half times sales and if you look at that company in comparison to other stocks, it is an attractive buy,” he added. “They have much lower than average airline stocks, they have high levels of free cash flow.” The stock has an average rating of overweight and trades about 23% above the average analyst price target, according to FactSet. Booking Holdings is also an analyst favorite with an above average rating and 10% above average price targets per FactSet. Mark Mahne of Evercore ISI is among those building fast on an online travel company. Booking beat earnings and revenue for the first quarter in early May, but its adjusted earnings before interest, taxes, depreciation and amortization fell short of estimates, per StreetAccount. Mahaney continues to like bookings for its strategic investments, which should support growth, and the company has made progress driving more traffic directly to its site. He also thinks that its valuation is intrinsically attractive. “There is clear discretionary consumer spending risk here, but strong valuation support with a management team and a business model that has been thoroughly tested over the past 20+ years should help,” he wrote in a May 5 note. European travel ‘off the trains’ Then there are some airlines, which are experiencing demand even amid high airfares. While prices are still high, the latest Consumer Price Index for April showed the airline fare index fell 2.6% month over month after rising in February and March. Airlines are essentially sold out for summer travel, according to TD Cowen analyst Helen Baker. They estimate that around 275 million people will travel between Thursday, May 25 and Monday, September 4. Three names that are well-positioned right now, Baker said, are United, Delta Air Lines and Copa Holdings, the parent of Panamanian airline Copa Airlines. His best idea for 2023 is United, because of its international flights. While 2021 and 2022 were about the recovery of US domestic travel, 2022 and 2023 are about the recovery of European flights and this year and next year are about the recovery in Asia, she said. “Travel to Europe this summer is going to be off the charts. Demand is very strong, especially given the strong dollar. Asia should pick up the pace,” he added. —CNBC’s Michael Bloom and Ashley Capute contributed reporting.
