3 undervalued travel stocks we like

-- | 22/10/2020

Page 1 of 1

Fears surrounding the duration and severity of the coronavirus pandemic have weighed on travel stocks, creating opportunity for long-term investors. Today we’re looking at three of our favorite travel names.

Our first pick is Expedia (EXPE). While COVID-19 will stress Expedia's financial health in the near term, we think the firm will maintain its sizable network advantage over the long term once the virus is contained. True, Expedia faces elevated debt leverage in 2020, but we believe it has enough liquidity to operate under anemic demand conditions through 2021. We expect Expedia's network advantage to remain intact and possibly strengthen after the COVID-19 crisis, because we think smaller peers would be challenged to fund the substantial human and operational capital needed to replicate the company's platform. Further, Expedia's new management team is focused on reinvesting cost efficiency into loyalty and user experience, which should support its network advantage. We assign Expedia a narrow Economic Moat Rating and a $127 fair value estimate.

Norwegian Cruise Line Holdings (NCLH) remains a favorite, given its wide margin of safety to our fair value estimate. The pandemic’s impact on capacity and occupancy levels are likely to be significant when sailing resumes, but recent commentary that pricing for 2021 has been holding up well implies that demand should recover. In our opinion, current concerns are transitory, and plenty of global demand remains untapped to support industry growth once the virus abates. Cruise companies are expanding the demand pie by tapping into new geographies and demographics via wider market segmentation than in the past. We think Norwegian can pivot nimbly to capitalise on evolving consumer trends and increase earnings per share growth by at least a double-digit pace annually between 2023 and 2027. We think shares are worth $25 apiece.

Our last pick is Wyndham Hotels & Resorts (WH). We believe investors are discounting the firm’s brand-intangible asset and switching-cost advantages. While sales will be materially affected by the pandemic, we expect Wyndham to outperform industry demand this year, given its exposure to economy/midscale units in nonurban and off-interstate locations, and 70 per cent of its room nights tied to leisure. These exposures tend to outperform when the economy contracts and individuals emphasise road trips versus air travel, such as they are this year. Further, Wyndham’s financial health remains good despite COVID-19 challenges. Longer term, the company’s scale will continue to offer third-party owners advertising, reservation, and loyalty program reach that can’t be achieved by smaller competitors. We assign Wyndham a narrow Economic Moat Rating and a $63.00 fair value estimate.

Senior equity analysts Dan Wasiolek and Jaime Katz provided the research behind this segment. 

This report appeared on www.morningstar.com.au 2021 Morningstar Australasia Pty Limited

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written content of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.