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Spending is shifting back to services; here's US stocks to play it - Part 2

Dave Sekera, CFA  |  21 Jul 2022Text size  Decrease  Increase  |  
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In part 2 of our series on how to play the transition back to services spending we look the reopening of public events and offices as well as ride sharing.

Ride-hailing

Ride-hailing fell off a cliff early in the pandemic as people were unwilling to venture out into public and certainly did not want to be sharing space in a car with a stranger. As the pandemic subsides, both the number of riders and frequency per rider have been recovering. We think both Uber and Lyft are well positioned to benefit, and both company’s stocks are trading at some of the most undervalued levels across our entire equity research coverage.

Travel technology

The travel technology sector is dominated by three players: Sabre, Expedia, and Booking Holdings. While we view all three as significantly undervalued, Sabre is the one we think is the most leveraged to the return of the business traveler. In addition, Sabre has revitalized its technology platform, which we project will help it drive greater innovation and higher margins.

Return to office

Workers are grudgingly returning to the office. According to Kastle Systems, a provider of office security solutions, its 10-city average occupancy index rose to above 44% in mid-June, near its highest level since the beginning of the pandemic. However, occupancy levels have moderated to 39.6% as of July 6, as the Fourth of July holiday and summer vacations took their toll.

As employees return to the office, if they're like most workers, they will also require coffee. With a loyalty program consisting of over 26 million users active over the past 90 days, we think Starbucks is undervalued. Loyalty program members represent over half of domestic sales, drive habitual purchases, and spend 2 to 3 times more than before joining the program. Starbucks’ stock has been under pressure as investors are concerned about the potential impacts from unionization drives. According to our sensitivity analysis, we think the market is being overly pessimistic about how much extra compensation expense from unionization would reduce intrinsic valuation.

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Return to public events

In addition to returning to restaurants and taverns, consumers are becoming more comfortable going to public events, including sports and concerts. As more people attend these events, we think it could be a positive catalyst for alcoholic beverage manufacturers.

During the pandemic, alcoholic beverage consumption shifted from public places to the home, where consumers often traded down to lower-margin brands. When consuming in public, consumers tend to choose higher-end brands, which in turn should drive higher margins. We think this shift to higher-margin brands could be a catalyst to reinvigorate investor interest in alcoholic manufacturers such as Anheuser-Busch InBev, Boston Beer, Constellation Brands, and Molson Coors, each of which is trading at significant margins of safety from our intrinsic valuations.

The pandemic rapidly led to major changes in individual and societal behaviors and the reverberations are still being felt today. While some behaviors may have permanently changed, we expect spending habits and patterns to revert toward historical norms. As these behaviors normalize, we see numerous opportunities in today’s market. For many of those companies that will benefit most, we see a significant number of them as undervalued and trading below their intrinsic value.

is chief U.S. market strategist for Morningstar.

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