A number of economic factors are currently providing tailwinds to the leisure industry including hotel, resort and cruise lines.
The U.S. economy continues to expand, with gross domestic product growth expected in the 3 percent range for 2015. Employment growth is strong and Americans are feeling more secure and prosperous. On top of this, oil prices are now at their lowest levels since 2009. The national average gasoline price is approximately $2.06 which is putting significant cash back into the wallets of consumers. Some of this cash will make its way into the travel and leisure industry as people look toward spring and summer vacations.
Furthermore, low oil prices also benefit many industries such as cruise lines, as fuel costs are a significant operating expense. In today’s column, we will look at hotel and cruise line stocks that may be poised to benefit for these economic tailwinds.
The screen. We will focus on finding stocks in the resort and cruise line industries, with strong earnings growth and profitability, as well as reasonable valuation levels. We begin by setting a minimum market-cap threshold of $2.5 billion. We wish to focus on the largest and most stable companies in this sector of the market.
Next, we will look for companies with strong earnings growth, as measured by their analyst projected earnings per share growth rate. We will select only companies with an EPS that is forecast to grow by 8 percent or more in the coming year. In order to find companies that are best able to profitably grow their businesses, we will select companies with operating margins of 5 percent or more. The operating margin measures how much profit a company makes on each incremental dollar of revenue.
Finally, in order to pick companies with reasonable valuation levels, we will specify a forward price-earnings ratio of no more than 30. Forward P/E benchmarks the current stock price against the expected earnings in the coming year, based on analysts’ expectations.
What did we find?
Norwegian Cruise Lines Holdings. It ranks number one on our screen. The company has very strong projected earnings growth and has a reasonable valuation compared to its peers, with a forward P/E of 20.2. The company announced strong third-quarter results in November, with earnings up 29 percent and revenue up 14 percent year-over-year. Analysts remain bullish on Norwegian Cruise Lines with projected EPS growth this year of 135 percent.
Wyndham Worldwide. This is the holding company for Wyndham Hotels and Resorts. Wyndham operates over 7,400 hotels worldwide in 66 countries under brands such as Wyndham, Travelodge and Ramada. Wyndham is very reasonably valued with a forward P/E of 19.2 and has good operating margins of 16.2 percent. This chain has good prospects for growth and profitability as Americans choose to travel more in the coming year.
Royal Caribbean Cruises. It is the second largest cruise line operator in the world. Like other cruise line companies, the falling price of oil is expected to provide Royal Caribbean with a significant earnings boost in the coming year. Analysts expect a 76 percent EPS growth rate this year. Research firm Fondsfinans expects Royal Caribbean’s EPS to double by 2017.
Marriott Vacations Worldwide Corp. This behemoth is the world’s largest “pure play” public timeshare company, running over 60 resorts under the Marriott Vacation Club, Grand Residences by Marriott and Ritz-Carlton Destination Club brands. This stock had a great run in 2014 and is up over 59 percent in the past twelve months. The stock shows signs of further growth with a strong forecasted EPS growth of 104 percent. However, the stock is not cheap with a forward P/E ratio of 28.1.
Recognia Strategy Builder provides a backtesting capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 25.3 percent annualized return, compared to 13.8 percent for the Standard & Poor’s 500 index.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is the vice president of retail and self-directed investing for Recognia, the industry leader in providing global retail investors with actionable insights to make confident trading decisions. Ashton is directly responsible for empowering the trading community of over 20 million investors to which Recognia is provisioned by ensuring all aspects of the company’s client service delivery, including the distribution of in-depth investment research culled from Recognia’s patented investing analytics.
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Top 4 Hotel and Cruise Line Stocks to Watch originally appeared on usnews.com