A Travel Package of Stocks
Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When you go to a travel site like Expedia, Travelocity, or Orbitz to book a trip, the websites will often offer travel packages complete with airfare, rental car, and hotel lodging. And they do this for a good reason. Not only do the booking sites make more money through more sales, but they also know travelers often require multiple purchases to fulfill their travel experience. This is a lesson for investors looking to play a rebound in both business and leisure travel. By making investments across multiple travel segments, investors can diversify their risk while maintaining an overall orientation towards a bullishness on travel.
There’s a lot to look at in the airline industry with a wave of mergers allowing for fare increases and fee increases. Legacy carriers are beginning to shake off the image of bankruptcy and are posting solid profits once again, while rivals such as Southwest Airlines continue expansion and discount carriers like Spirit Airlines show just what passengers will endure to get a cheaper fare.
My pick in this sector is Delta Air Lines (NYSE: DAL) as it provides exposure to both business and leisure travel on a massive scale. A worldwide network of both Delta flights and SkyTeam partner flights gives investors the ability to benefit from both U.S. travel demand and worldwide growth. When it comes to moving in this industry, Delta isn’t standing still either. In a move to attract more business travelers, Delta purchased a 49 percent equity stake in Virgin Atlantic to provide more flights to London Heathrow from Delta’s recently renovated New York operations.
The airline is even trying to manage its fuel costs by purchasing an oil refinery. Although Delta will still be unable to control the actual cost of oil, the refinery purchase is expected to help the airline narrow the crack spread and is expected to save Delta $300 million annually.
When you get to your destination, there is a pretty good chance you will need to rent a car. In this way, air travel helps to fuel rental car demand as travelers need a mode of transportation at their destination. In this sector, there are three large rental car companies, of which only two are publicly traded. Privately owned Enterprise Holdings locks up the top spot but Hertz Global Holdings (NYSE: HTZ) and Avis Budget Group (NASDAQ: CAR) are strong competitors in the field as well.
Earnings for both companies are expected to see strong increases over the next few years as demand picks up and reduced competition helps to fuel price increases. Hertz gained attention when Barron’s featured the company, suggesting its shares could rise 70 percent over the next few years. The trends that paint this positive picture for Hertz are similar to those that will be affecting Avis over the next few years.
The merger between Hertz and Dollar Thrifty should help to reduce competition in this industry. While this is not expected to benefit consumers, the price increases and economies of scale that can be realized should benefit shareholders of rental car companies, in this case those of Hertz and Avis Budget.
With so many hotels out there it is often hard to pick just one. The same goes with hotel stocks, with each competitor offering its own unique locations and brands. Among my favorites in this industry is InterContinental Hotels Group PLC (NYSE: IHG), a company that seeks to reward its shareholders in three ways.
The first way is one which all companies strive to do, and that is share price appreciation. Shares went on a fairly good run since early 2012 but slipped back away from the $30 mark in April. If hotels rise along with the broader market, IHG could be ready to move back to the $30 level in the near future.
Unlike most airlines and rental car companies, IHG pays shareholders a dividend of 2.3 percent. While this is not the level that would really qualify IHG as an income stock, it does help to return a bit of capital to shareholders as they wait for the share price to rise along with the economic recovery.
But the final way is something that is not seen as much as it used to be. IHG offers registered shareholders access to a dedicated website that provides discounts on bookings at IHG hotels. Unless you’re staying at a lot of IHG hotels, this discount is unlikely to make a strong enough financial argument on its own but it is nice to see that IHG is taking steps to be shareholder friendly and reward shareholders whenever possible.
Many investors are bullish on travel as part of a broader economic recovery but want to remain diversified across multiple industries. Fortunately, the travel market offers a lot of components allowing investors to both invest in travel and diversify their risk. Similar to booking a vacation on a travel site, the market offers investors a broad range of options to chose from for their travel investing experience.
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Alexander MacLennan owns shares of Delta Air Lines. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool owns shares of Hertz Global Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!