As discretionary spending weakens, consider selling travel stocks to reduce risk
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Considering selling travel stocks may seem counterintuitive amid what is expected to be a booming summer season for the travel industry. Despite macroeconomic headwinds, analysts expect demand to remain strong in the coming months. What's more, travel companies are recovering from the pandemic-induced economic slowdown and poised to spread their wings.
However, recent research from Deloitte suggests caution is warranted. US consumers' discretionary spending plans remain weak, while housing spending intentions are rising. Additionally, travel spending intentions declined last month, but remain strong overall. Thus, the resilience of the travel sector and a weak economy may restrain the expected growth and recovery of the travel sector in the near term.
It is therefore imperative that investors consider the macroeconomic backdrop before making any decisions. While travel stocks are attractive given the bright outlook for the summer, current economic indicators suggest a more cautious approach.
Marriott International (MAR)
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Marriott International (NYSE:MAR), the global hotel and hospitality chain, had a surprisingly strong year last year, with its shares rising by more than 30%. However, the momentum didn't carry over into 2024, with the stock up just 3% year-to-date (YTD). Bulls may argue that macroeconomic factors are to blame for the decline in the stock, but the real culprit is the weak economy.
The company has struggled with sluggish room revenue growth in the U.S., weighing on its stock price. Revenue per available room (revPAR) in North America rose just 1.5%, compared with an 11.1% increase in international markets. The difference points to an uneven recovery in post-pandemic travel demand, with domestic travel lagging far behind.
Additionally, first quarter (Q1) results showed an 8% decline in operating income and a 25% decline in net income. Furthermore, the hotel giant's financial position is a major concern, with debt increasing 6.7% to $12.7 billion and cash and cash equivalents at $400 million. This suggests that the company only has about 3.15 cents in cash for every dollar of debt, raising serious liquidity concerns.
Southwest Airlines (LUV)
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Southwest Airlines (NYSE:LUV) thrived as a low-cost champion when the world opened up again after the pandemic. But the airline landscape has changed forever, with rising labor costs and continued inflation squeezing profits. Now, the company's profit margins are well below its historical averages.
Additionally, Boeing (NYSE:BA) production delays have only exacerbated the company's woes, with the company only receiving 20 planes this year instead of the planned 84. As a result, LUV shares have fallen more than 3.5% so far this year on the back of a weak 2023 outlook.
As a result, analysts are less optimistic about Southwest's near-term upside potential. Argus downgraded the company's shares to a “hold” from a consensus rating of “buy.” Analyst John Staszak said concerns about rising labor costs and further delays to aircraft deliveries prompted the downgrade. As a result, the research firm cut its profit forecasts for the next few years, casting a dark shadow over Southwest's prospects.
TripAdvisor (Travel)
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It's been a tough few weeks for online travel review platform TripAdvisor (NASDAQ:TRIP), with its shares plummeting more than 28% over the past month. A respite from first-quarter results was overshadowed by the company walking away from acquisition talks.
TRIP's stock price rose following the formation of a committee to consider takeover proposals, which attracted significant interest from big names like Apollo Global Management (NYSE:APO). However, this change of mind caused the stock to reverse course and hit a 52-week low.
Additionally, the company's prospects are clouded by an increasingly competitive and cutthroat online travel market. Additionally, the company has been hit hard by recent changes in Google's search algorithm, weakening its market position. These setbacks have put TripAdvisor in a precarious position and are likely to make its path to recovery more difficult. Investor confidence in the company's stock is low, which is slowing the company's growth trajectory.
As of the date of publication, Muslim Farooq did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author in accordance with InvestorPlace.com's Publishing Guidelines.
Muslim Farooq is an avid investor and optimist at heart. A lifelong gamer and technology enthusiast, he has a particular interest in analyzing technology stocks. Muslim holds a Bachelor of Science in Applied Accounting from Oxford Brookes University.
