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5 ways to play the European invasion
The weak dollar is making it more attractive for Europeans to vacation in America. That means more business for travel companies, hotels, theme parks and casinos.
By Robert Walberg
The Europeans are coming -- and they're bringing their money.
Investors are betting that a sharp decline in the dollar against the euro will make the United States a top vacation destination for the folks from across the pond. This storyline has already provided a nice boost for many travel-related stocks. But there are still opportunities for investors to cash in on, considering that most economists see the greenback extending its decline in 2005.
Tourists cant begin to spend their hard-earned euros in this country until they arrive, so the obvious place to begin our hunt for investment candidates is with the companies used to book air, car and hotel reservations. One company making big strides in this burgeoning industry is Cendant (CD, news, msgs).
Over the past couple of years, the company has been aggressively building an integrated travel division that includes Orbitz, CheapTickets.com, Lodging.com, Avis, Budget, Ramada, Days Inn, Howard Johnson, Knights Inn and a global distribution system that connects travel agents and Web sites with air, auto and hotel inventory. Cendant also recently announced that it plans to acquire Britains ebookers (EBKR, news, msgs) for roughly $404 million, giving it a major toehold in the growing European marketplace. Outside of travel, the company has a significant presence in the retail mortgage and financial services industries.
Earnings this year are expected to jump more than 20% to $1.71 and then slip back a bit next year as higher interest rates weigh on the companys financial business units. Nevertheless, at about 13 times this years estimated earnings and only 16 times next years consensus projection, the stock is cheap relative to its peer group, which sports an average forward price-to-earnings ratio of about 31. Cendants operating margins and return on equity are also among the industry's best -- as is its 1.6% dividend yield and MSN Money StockScouter rating of 9 on Dec. 14.
Ready to rise
Assuming the company merely hits its sales and earnings projections, theres no reason to think that the stock wont be accorded a price-to-earnings-to-growth rate, or PEG, of at least 1.25 times. Based on an expected long-term growth rate of 15%, this means the stock is set for a move to about $26 to $27 a share.
Another interesting play in this area is IAC InterActiveCorp (IACI, news, msgs). Its travel unit includes such recognizable names as Expedia, Hotels and Hotwire.com. Growth in this area has been robust, though there are some concerns that the pricing advantages that online travel companies offer is dissipating. Another concern: Airlines and hotel companies are guiding more consumers to their sites, potentially hampering sales. While there's some merit to these arguments, the company has an excellent management team and a consistent record of sales and earnings growth.
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IAC's Ticketmaster unit could also see a nice pop as foreigners coming here buy tickets for Broadway shows, concerts and other events.
Though IAC lagged the group this year, falling about 13% over the past 52 weeks, reasonable valuations, a strong balance sheet (about $3 per share in cash, less debt) and positive cash flow make it an attractive turnaround candidate. Investors should also note the heavy short position in the stock. (Short sellers borrow stock and sell it in the hope that they'll be able to buy it back later at a lower price to return to the lender.) But if ICA shares start to run, the shorts would be forced to buy stock to stem their losses, adding fuel to the ascent. With momentum improving and earnings expected to grow by 13% this year and next, shares should have little trouble hitting the $32 to $34 area over the next 12 months.
The other two leaders in this group are priceline.com (PCLN, news, msgs) and Sabre Holdings (TSG, news, msgs). While priceline enjoys the highest growth rates in the group, its multiples (26 times 2004 earnings and 20 times 2005 earnings) are a bit high for my liking, especially given its history of inconsistent results. Sabre is less of a pure play on the theme, and its technical, or stock chart, configuration leaves a lot to be desired. The shares are off 19% from peaks hit in June and are trading below their 50-day and 200-day moving averages.
Gonna need a place to stay
Once Europeans have booked their travel plans, theyre going to have to book hotel rooms. Unfortunately for them, rates are apt to be high as demand has soared and new supply is limited. Bolstered by the jump in room rates, higher occupancy rates and the falling dollar, the hotel industry has posted impressive results again in 2004.
Though the same is expected for next year, investors have already bid most of these stocks up to their highest levels in quite some time. Four Seasons Hotel (FS, news, msgs) and Fairmont Hotels & Resorts (FHR, news, msgs) are trading above their 52-week highs and sport forward P/E multiples of 61 and 45, respectively. At about 25 times 2004 estimated earnings, Marriott International (MAR, news, msgs) is the cheapest stock in the group, but its discounted multiple can be explained in part by its relatively weak operating profit margins.
The only stock in the group offering a decent mix of value, growth and sound financials is Hilton Hotels (HLT, news, msgs). Its P/E ratio based on 2005 estimated earnings is nearly 30, or just a bit more than the earnings growth rate of 27.9%. The average PEG in the industry is 1.82. Given its strong projected growth, industry-best margins, high return on equity and ample cash flow, the stock is attractive up to the $26 to $27 area. Traders should also note that Hilton has the strongest concentration in the United States, making it the purest play on the theme.
The mouse should rock
Where are Europeans likely to spend their discretionary cash? An obvious destination, despite the hurricanes, is Florida, where a premier attraction is Walt Disney World (even though Euro Disney has never lived up to expectations). So, if foreign travel picks up to the United States next year, its safe to assume that theme park attendance at Walt Disney (DIS, news, msgs) properties will rise, and so will profits.
In fact, the Street expects Disneys fiscal 2006 earnings to jump nearly 14% to $1.41 per share. At 22 times the 2005 estimates, the stock isnt necessarily cheap. Compared with many of its peers, however, it's undervalued. Look for an increase in domestic theme park business, combined with the expected management changes, to unleash some of that value. The stock has an intermediate-term upside to the $32 to $33 range.
Viva Las Vegas!
The mouse might attract the families, but look for Las Vegas to top the destination list of many adults. Casino stocks, like hotel shares, have enjoyed a spectacular run over the past year due to improving business and a rash of takeover activity. Plus, shares of Las Vegas Sands (LVS, news, msgs) started trading this week and promptly jumped 65%. So its tough to find value in this group. Still, there's one stock worth considering.
MGM Mirage (MGG, news, msgs) is in the process of acquiring Mandalay Resort Group (MBG, news, msgs) for about $8 billion, making it the world's No. 2 casino company behind Harrahs Entertainment (HET, news, msgs). Though it may be second to Harrahs in scope, it's the No. 1 company on The Strip, with far more marquee properties than its peers. Assuming European tourists flock to Vegas, MGM Mirage should capture the lions share of this business. Again, the stock has had a big run this year -- it's up nearly 80% -- and valuations are a bit rich. But as long as it stays above $60 (something technicians call support), the uptrend should remain intact at least for another three to six months.
If the dollar continues to drop relative to the euro, we could be in for perhaps the biggest European invasion since the Beatles. While there wont be any heartsick young girls to mark their arrival, you might get heartsick if you dont invest in some of the companies most likely to win from this budding trend.
At the time of publication, Robert Walberg neither owned nor controlled shares in any equities mentioned in this column.
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