3 travel stocks going places this summer

Exaggerated fears that high gas prices will bring about the return of the 'staycation' this summer have pressured share prices of these travel stocks down to bargain levels.

By TheStreet Staff Apr 6, 2011 10:36AM

Image: Beach (© Corbis)By Robert Walberg, TheStreet

 

The Cubs are playing baseball again, the Masters starts this weekend, and Easter is just around the corner. Despite the unseasonably cool weather, spring is in full bloom, and that means it's time to start planning summer vacations.

 

Of course, with average gasoline prices fast approaching $4 per gallon, more and more people might choose to stay at, or near, home this year -- a development that many investors fear will put downward pressure on stocks tied to the travel industry. There are three reasons that I think these fears are grossly exaggerated and that now is a great time for investors to snap up some travel-related bargains.

 

There's no arguing that the current climate is starting to look a lot like that of 2008, when crude oil spiked to $145 per barrel, gas at the pump rose to an average of $4.11 per gallon and airlines raised fares 15 times.

 

While we aren't seeing those extremes yet, airfares have risen about 25% since the start of the year, gas prices have jumped nearly 13% over the past month (to an average of $3.51), and crude is again north of $108 per barrel. As such, the cost of travel this summer is certainly going to give some people pause. But the "staycation" that was so popular in 2008 isn't likely to become the norm this year.

First of all, when gas surged above $4 a gallon in 2008, it was a shock to consumers. That is no longer the case. Gas prices have been climbing steadily, and we have seen little to no impact on consumer behavior. Consumers might not like the idea of $4 gasoline, but they are no longer shocked by the reality of it, and that lack of shock means they are less likely to alter normal spending habits.

 

But the biggest factor offsetting the rise in fuel prices is the improvement in the employment picture. An unemployment rate of 8.8% might be historically high, but the trend over the past few months is definitely improving as corporate hiring exceeds most expectations. With corporate earnings likely to grow by double digits again in 2011, the hiring trends will continue to improve, and that will be good news for consumer confidence and spending.

 

Confidence is key when it comes to spending. Barring an unexpected shock, improvements in the job market, stabilizing real-estate prices and a stock market rallying to new recovery highs suggest that consumers will be much more confident this year than they were in summer 2008, when real-estate prices were beginning to fall and the financial crisis was coming to a head.

 

Finally, domestic travel-related companies stand to benefit from the weak dollar. Europeans in particular are likely to take advantage of weakness in the greenback to travel to the U.S. That's good news for higher-end hotel and tourist destinations.

 

So while elevated gas, hotel and airline costs are likely to give consumers pause when it comes to planning their summer vacations this year -- and may prompt some to alter their plans a bit -- the positive offsets of employment gains, rising consumer confidence and a weak dollar suggest that recent weakness in the travel sector is overblown. Three stocks that I believe are poised to deliver strong results this summer travel season are Las Vegas Sands, Starwood Hotels & Resorts and Walt Disney.

 

1. Las Vegas Sands (LVS) is my top pick in the hotel and gaming sector  because of several strong growth drivers, including Macau, Singapore and a rebounding Las Vegas. The stock has come under fire recently because of investigations by the Department of Justice and the Securities and Exchange Commission into alleged violations of the Foreign Corrupt Practices Act. The company's Sands China unit is also under investigation by the Hong Kong Securities and Futures Commission for alleged regulatory breaches.

 

While there is definitely headline risk associated with these investigations, the underlying business remains incredibly strong, and the recent price dip creates a good long-term buying opportunity. Our price target is $62, or 39% above current levels.

 

2. Starwood Hotels & Resorts (HOT) is another stock that has come under pressure recently amid concerns that the jump in crude would adversely affect business at its hotels and resorts. However, Starwood continues to win market share, especially at the high end of the consumer market -- the group least likely to be hit by an increase in travel costs.

 

The lack of new building combined with the increase in overall demand has led to higher average prices, and that is good news for margins and earnings. We expect this industry leader to snap back and have a price target of $71, or 25% above today's price.

 

3. The Walt Disney Co. (DIS) stands to benefit from increased domestic travel spending, as its theme parks are among the nation's top tourist destinations. Combine those folks who can't afford to travel overseas with foreigners who want to take advantage of the cheap dollar, and the house the mouse built should see a nice jump in visitors. And Disney has reduced discounting at its parks, which should help improve margins.

Disney has several income streams that are unrelated to travel, but anxiety over attendance at its parks pulled the stock down from its recent highs. That retreat represents a great chance to buy into one of the best-run companies in the country. Our upside price target is $52+, or 22% above current prices.

 

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