TripAdvisor, which was spun off from Expedia in December, specializes in user reviews of hotels and makes most of its money from click-based advertising. Expedia and Priceline book flights, hotel stays and car reservations in exchange for a cut that’s negotiated with the supplier.
It’s not just dotcoms that are rising. Hoteliers Marriott International (MAR) and Wyndham Worldwide (WYN) are up 27% and 33%, respectively. Even Delta (DAL) and United Continental Holdings (UAL) are up 27% and 21%.
The travel industry is economically sensitive, and gross domestic product growth in the U.S. has been slowing. Why, then, are the stocks doing so well?
The travel websites make more money from hotels than from air travel, and the hotel industry is recovering. PwC, an accounting and consulting firm, reports that business travel is picking up, particularly in the finance and technology industries, and that consumers who have put off spending on cars and appliances have resumed traveling for leisure.
Average daily room nights have now surpassed their 2007 peak. Supply growth is minimal: 0.6% per year, after subtracting for removals of closed hotels. PwC expects the U.S. occupancy rate, a key driver of profits, to rise to 61.3% this year, from 60% last year. Hoteliers, meanwhile, continue building overseas in fast-growing markets like China.
Airlines don’t have it quite as good. Airlines for America, a trade group, forecasts flat spending on U.S. flights this year. Earlier this month, the International Air Transport Association reaffirmed its forecast for global airline profits of $3 billion this year — down from nearly $8 billion last year and $16 billion in 2010.
But much of the profit squeeze is owed to higher fuel costs, and the price for Brent crude oil has fallen about 13% this year. Given that profit margins for airlines are thin, any drop in fuel costs could make a big difference. And mergers, like a 2009 one between Delta and Northwest and a 2010 one between Continental and United, are gradually yielding lower costs and stronger pricing.
Investors should think twice before buying into the travel stock rally, however. The aforementioned airlines trade at only around five times this year’s earnings estimates–a seeming bargain compared with the S&P 500 index, which trades at 13 times earnings estimates. But the discounts reflect the fact that both companies carry heavy debt and have a history of volatile profits.
The rest of the group sells for plenty more. TripAdvisor is at 29 times earnings; Expedia 17 times; and Priceline 20 times. Expedia shares lost 2.7% Wednesday after Jake Fuller of Lazard Capital Markets cut his recommendation to hold from buy, citing an “aggressive” valuation and “decelerating U.S. bookings growth”. Marriott sells for 22 times earnings and Wyndham, 16 times.
Each of these companies is generating healthy profit growth and a continued rise in hotel demand could send their shares higher. But with the broad market looking inexpensive and the economy, wobbly, there seems little reason to pay top dollar for a bet on travel.