Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Is the market getting too excited about travel stocks?
Peter Garnry
Chief Investment Strategist
Summary: The travel industry is the best performing theme basket this year enjoying the love of investors betting on a strong demand picture for the industry as economies reopen. Judging from the current levels close to their highest in five years it seems investors are betting not only on a strong rebound in activity but also pricing power driven by excess demand and supply constraints. What makes our travel basket of 40 stocks interesting is that the prevailing equity indices and ETFs tracking this segment are sparse and poorly designed.
Today we are launching our seventh equity theme basket with the new one focusing on travel stocks. This segment of the equity market is poorly tracked through suboptimal equity indices and ETFs. Saxo’s travel theme basket will be much broader, span many different industries around traveling, and be better diversified across geographies. The basket will help clients and our research team to monitor the market’s discounting of the reopening and the resuming of travel activities.
A broader perspective on travel
When you look at the current equity indices on travel and the available ETFs this part of the equity market has not enjoyed a lot of love. The main equity index is the STOXX 600 Travel & Leisure Index, but this index is narrow, and it also includes gaming stocks. Our travel basket consists of 40 stocks (see below) spanning the entire value chain from airliner manufacturers, booking platforms, hotel chains, travel software, airlines, cruise lines, airports, and resorts, and across many different exchanges around the world. The travel basket is designed to take advantage of an increase in traveling across both the leisure and business segments.
| Name | GICS Sub-industry | Market Cap (USD mn.) | F12M Sales growth (%) | 12M EBITDA margin (%) | Diff to PT (%) |
| Boeing Co/The | Airliner manufacturer | 157,110 | -24.0 | -19.1 | -11.9 |
| Airbnb Inc | Booking platform | 125,788 | -29.7 | -95.4 | -12.2 |
| Booking Holdings Inc | Booking platform | 98,351 | -54.9 | 18.1 | 2.6 |
| Airbus SE | Airliner manufacturer | 93,951 | -29.2 | 6.8 | 6.4 |
| Marriott International Inc/MD | Hotel chain | 48,727 | -49.6 | 10.1 | -6.8 |
| Hilton Worldwide Holdings Inc | Hotel chain | 35,006 | -54.4 | 17.8 | -6.5 |
| Southwest Airlines Co | Airlines | 36,049 | -59.7 | -27.3 | -6.3 |
| Amadeus IT Group SA | Travel software | 33,831 | -61.0 | 14.2 | -11.3 |
| Delta Air Lines Inc | Airlines | 31,799 | -63.6 | -28.2 | -3.6 |
| Carnival Corp | Cruise lines | 30,216 | -73.1 | -30.6 | -26.6 |
| Aena SME SA | Airport Services | 26,185 | -50.5 | 42.3 | -1.6 |
| Expedia Group Inc | Booking platform | 25,117 | -56.9 | -5.5 | -8.0 |
| Trip.com Group Ltd | Booking platform | 25,727 | -48.6 | 18.3 | 1.6 |
| Royal Caribbean Cruises Ltd | Cruise lines | 22,966 | -79.8 | -66.9 | -8.4 |
| Ryanair Holdings PLC | Airlines | 22,153 | -68.3 | 22.1 | 5.2 |
| Huazhu Group Ltd | Hotel chain | 18,224 | -8.7 | 27.6 | -3.7 |
| Shanghai International Airport Co Ltd | Airport Services | 18,005 | -41.9 | 56.7 | 9.9 |
| Air China Ltd | Airlines | 17,520 | -27.1 | 26.3 | 4.6 |
| International Consolidated Airlines Group SA | Airlines | 14,889 | -69.4 | -17.0 | -4.3 |
| China Southern Airlines Co Ltd | Airlines | 15,388 | -32.0 | 22.7 | -4.3 |
| Sydney Airport | Airport Services | 13,239 | -51.0 | 63.2 | -0.2 |
| InterContinental Hotels Group PLC | Hotel chain | 13,214 | -48.3 | 5.8 | -11.2 |
| Aeroports de Paris | Airport Services | 13,228 | -54.5 | 7.9 | -6.5 |
| Vail Resorts Inc | Ski resorts | 12,681 | -33.7 | 28.2 | 2.8 |
| Host Hotels & Resorts Inc | Hotel REITs | 12,153 | -70.4 | -27.0 | -3.3 |
| Norwegian Cruise Line Holdings Ltd | Cruise lines | 11,315 | -80.2 | -84.8 | -3.5 |
| Accor SA | Hotel chain | 10,840 | -60.0 | 23.8 | -8.1 |
| Whitbread PLC | Hotel chain | 9,772 | -39.7 | 37.5 | -0.4 |
| TripAdvisor Inc | Booking platform | 8,061 | -61.3 | -21.4 | -35.2 |
| TravelSky Technology Ltd | Travel software | 7,516 | -15.8 | 41.1 | 7.6 |
| TUI AG | Travel agency | 6,668 | -76.2 | -6.5 | -52.5 |
| Choice Hotels International Inc | Hotel chain | 5,994 | -30.6 | 37.8 | -2.5 |
| Travel + Leisure Co | Hospitality services | 5,328 | -45.4 | 7.0 | 9.3 |
| Park Hotels & Resorts Inc | Hotel REITs | 5,387 | -70.0 | -26.4 | -10.0 |
| Grupo Aeroportuario del Sureste SAB de CV | Airport Services | 5,295 | -24.9 | 41.3 | -4.7 |
| Sabre Corp | Travel software | 5,163 | -66.4 | -31.7 | -14.7 |
| MakeMyTrip Ltd | Booking platform | 3,821 | -64.1 | -24.2 | -2.5 |
| Flight Centre Travel Group Ltd | Travel agency | 2,854 | -83.7 | -42.1 | -3.0 |
| On the Beach Group PLC | Booking platform | 1,089 | -76.0 | -101.5 | -19.2 |
| Airtrip Corp | Travel agency | 412 | -28.1 | -4.1 | 66.3 |
| Aggregate figures (sum or mean) | 1,051,034 | -51.6 | -2.1 | -4.4 |
Source: Bloomberg and Saxo Group
The basket represents $1.05trn in market value with most of market value concentrated in Boeing, Airbnb, Booking, Airbus and Marriott International. As the table show, travel companies have experienced a dramatic decline in revenue of 52% and with EBITDA margins going negative for many companies. Over the next 1-2 years revenue will bounce back significantly as the world begins travelling again. It is also interesting to observe that most of the travel stocks are currently priced above analyst price targets.
Best performing segment YTD
This year travel stocks have done very well being the best performing theme basket up 21.3% even surpassing our commodity basket that is enjoying the reflation trade. Travel stocks are of course riding the reopening trades which are bets on parts of the equity market that will do well over the coming year as vaccinations will allow economies to open again and increase traveling activity.
As the long-term price chart below shows, the travel basket is now fast approaching the highest levels since late 2015 indicating strong expectations for profitability. The initial phase of traveling will likely see an increase in short to medium distanced traveling and long distance only slowly increasing, and we do not fully know to what degree consumer and business behaviour has changed as it relates to travel activity. Many of the companies in our basket are valued at high 2-year forward multiples and have increased their debt of the balance sheet to keep assets and their operations intact. Further price increases from current levels would suggest that investors are betting that travel related companies will be able to charge higher prices during the normalization period due to excessive demand and supply constraints caused by bankruptcies etc.
As with all our theme basket is it important to observe that the basket does not represent investment recommendations and the companies are not chosen based on which companies, we expect to do the best, but instead chosen based on what gives the best exposure profile to the overall theme. The historical total return of the travel basket is also not an indicator of future performance.
Risks
The biggest risk to the travel basket is further delays of vaccinations including more bad news from AstraZeneca as it could delay or even jeopardize the important summer holiday. Many of the travel companies are also valued at historically high valuations which could negatively impact future returns if profitability is not restored to levels beyond where it was prior to the pandemic. Most critical over the coming years are to what degree behaviour has changed permanently regarding business traveling. Many companies have seen how much money can be saved by limiting business traveling so the big question is whether it is coming back and if so, how fast will it take?
Previous notes on equity themes:
The commodity sector and the reflation trade in 2021 – 4 January 2021
Bubble stocks go into ‘hyperdrive’ mode – 8 January 2021
Introducing Next Generation Medicine basket – 20 January 2021
Updating our Green Transformation theme basket – 29 January 2021
Launching Saxo’s E-commerce theme basket as more growth lies ahead – 5 February 2021
Be careful of bubble stocks and updating bubble methodology – 12 February 2021
Gaming is a long-term winning industry – 26 February 2021
Black energy takes the lead as green transformation stocks turn negative - 3 March 2021
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