Preferentially Buy Carnival Over These 2 Stocks
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With the economy going nowhere, many investors have reason to be reserved on vacation-oriented stocks. Even still, firms like Marriott International (NYSE: MAR) and Hyatt Hotels (NYSE: H) trade at high multiples and are near their 52-week highs. Others, like Carnival (NYSE: CCL), are still expensive but are attractive in the long-term. Below, I review the fundamentals of all three stocks.
Marriott & Hyatt
When it comes to multiples, these two hotel managers rank amongst the priciest stocks. Marriott trades at a respective 67.5x and 20.5x past and forward earnings versus corresponding figures of 60x and 46x for Hyatt. Single-digit ROA and ROI make both firms very uncompelling at this point. While the two have been able to stay at high multiples for years, there is no guarantee that this could continue into the future. In fact, poor earnings relative to high-growth peers will send investors rushing for the exits. After all, why put your money into a low earnings yield when there is attractive activity elsewhere?
Operationally, Hyatt has done better than analysts expected. 4 of the last 5 quarters have been better than analysts expected. 2Q11, 3Q11, and 4Q11 were particularly strong with expectations more than double analyst forecasts. The implementation of a $200 million share repurchase program illustrates management confidence about free cash flow generation going forward. However, economic reports suggest weak consumer spending and the hospitality industry has a 2 quarter lag against the overall economy - meaning a recovery won't be felt until six months after the market has fully recovered.
In contrast to Hyatt, Marriott has done much worse and has been basically in-line with analyst forecasts. If its competitor is able to beat the bar that has been set for it while Marriott fails, it could see a flood of investor "sell" orders. Analysts are predicting 17.3% annual EPS growth over the next 5 years - a significant number considering that there were double-digit losses in the preceding 5. Accordingly, I recommend exiting the stock before the market seeks stronger momentum elsewhere.
Carnival
Compared to Hyatt and Marriott, Carnival sells at bargain prices of 20.8x and 15.1x past and forward earnings, respectively. The PEG ratio is still at 1.75, which indicates that future growth has been more than factored into the stock price. In my view, however, the cruise ship operator looks good in the long-term.
Second quarter performance was better than analysts expected with EPS of $0.20 (down 6 cents from a year ago), it was well above the $0.07 consensus. Cost-cutting measures helped to offset a 12% rise in fuel costs, which the company also hedged against. Although the Costa Concordia incident has damaged the brand image, this is not going to be a big deal in the longer-term. Moreover, expenses related to the disaster were lower than expected, and domestic brands were still up 1.5% as a result of greater yields in Alaska and the Caribbean.
The company's strategy of hiking up marketing to stimulate demand has been paying dividends. Bookings saw a strong rebound in early April and even bookings and pricing in the United Kingdom have held up reasonably well. Accordingly, I recommend buying shares to profit from greater consumer activity during a full recovery.
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