Travel stocks fall as coronavirus spreads

The outbreak of the contagious coronavirus in China and its rapid spread to other parts of the world has triggered widespread panic. As death toll climbs and countries scramble to contain the spread of the mysterious new virus and its catastrophic effects that could potentially be 10 times bigger than the SARS epidemic, the ripples of anxiety have travelled far and wide rocking stock markets globally. The travel-related stocks – from airlines to online travel agencies and hospitality -- have been amongst the worst hit.

For pragmatic long-term investors, though, the potential pandemic has created rare buying opportunities with some travel stocks dipping too far too quickly. At a time like this, it bears repeating that the travel and tourism sector remains one of the strongest pillars of the global economy, creating millions of jobs and accounting for more than 10% of global GDP, according to the World Travel & Tourism Council (WTTC).

Leading travel companies may not be immune tomacroeconomic events, but their growth prospects and business fundamentals make them reliable prospects for long-term investment. History shows any short-term health scare only creates new entry points, further enhancing the attractiveness of these stocks, before things bounce back.

China’s largest online travel agency, Trip.com Group (TCOM), generates about 82% of sales by serving as a consolidator for hotel reservations and air ticketing transactions.

The company’s stock has fallen more than 17% over the past five days, as of Jan 24, since the outbreak of coronavirus hit global headlines. Formerly known as Ctrip.com, the Chinese online travel giant is “one of the companies covered by Morningstar that will likely be affected the most by the coronavirus outbreak,” says a Morningstar equity report, but adds the current 3% mortality rate of the virus is significantly lower than the 14% to 15% rate estimated by the World Health Organization during the SARS epidemic.

The travel operator has been seeking growth through international expansion, greater penetration of smaller cities in China, and enhanced product offerings. The Trip.com app is a one-stop shop for travellers providing 60 travel-related products and services including accommodation, airline, ferry, bus tickets, package tours, and high-speed railway packages.

The travel agency continues to benefit from the rising middle class and outbound travel demand in China, where currently only 10% of the population travels outbound. “We think its faster-growing higher-margin international business will raise the overall margin,” says Morningstar equity analyst Chelsey Tam, who maintains the stock’s US$50 per ADR fair value, assuring “SARS did not have a long-term effect on our coverage of companies’ financials in the past.”

Canada’s largest airline, Air Canada (AC) serves nearly 50 million passengers each year through 1,500 daily flights to around 200 destinations.

Hit by the China virus news the Canada’s flag carrier’s stock has fallen 10% over the past five days, as of Jan 24.

The airline has reported a strong third quarter, though, “as weak oil prices partially offset complications related to the grounding of the Boeing 737 MAX,” says a Morningstar equity report.

Despite the Boeing 737 Max grounding, the company is performing reasonably well, prompting Morningstar equity analyst Burkett Huey to raise the stock’s fair value from $44 to $53.

“Passenger revenues increased 2.9% on a capacity decrease of 2.1%, as higher passenger loads and yields more than offset the decrease in available seat miles resulting from the grounding of about 24% of the airline’s narrow-body fleet,” she notes.

As part of a major revenue and cost transformation program initiated in 2009, the company has engaged in route optimization, schedule changes, and fleet retooling. As well, realizing the limitations of the domestic market, Air Canada has “embarked on global expansion strategies, ordering widebody aircraft and capitalizing on sixth freedom traffic (flying U.S. passengers internationally from Canadian airports),” says Huey.

Air Canada plans to acquire Transat, the third-largest Canadian airline. The combined entity would control 60% of the Canadian transatlantic market.

One of the world’s largest airlines, Delta Air Lines (DAL) flies to more than 325 destinations across 60 countries. The Atlanta-based carrier gathers and distributes passengers across the globe through key locations in Atlanta, New York, Salt Lake City, Detroit, Seattle, and Minneapolis-St. Paul.

Like its peers, Delta stock got buffeted by China virus scare and tumbled as much as 5% in the last five days, as of Jan 24. 

The recent blip, however, doesn’t detract from Delta’s strong performance as the airline remains largely unaffected by the continued grounding of the Boeing 737 MAX. “Delta is the only major U.S. carrier that has no exposure to the 737 MAX,” says a Morningstar equity report, noting Delta stands to benefit from the slower ramping of the MAX production, which will stifle rival carriers’ capacity growth.

The airline utilizes a unique network that centres on its presence at hubs like Atlanta, New York, Minneapolis, and Detroit, which helps it extract a revenue premium. “Delta commands nearly 73% market share at Atlanta--the highest market share of any network carrier at a hub--and 40% of its network goes through Atlanta, exposing the carrier to more domestic regional traffic than peers,” says Huey, who recently raised the stock’s fair value from US$59 to US$61, and projected robust domestic demand on weak competitor capacity in 2020, and solid transborder performance.

World’s largest online travel agency by revenue, Booking (BKNG) offers booking services for hotel and vacation rooms, airline tickets, and other vacation packages. The company owns and operates Priceline.com, Booking.com, Agoda, OpenTable, and Rentalcars.com. The company controls around 35% of the online travel agency (OTA) booking market.

Given its large exposure to China, the stock cratered more than 4% over the past few days, as of Jan 24. The recent pullback notwithstanding the firm’s global share of the US$1.8 trillion total travel bookings market is forecasted to reach 7% in 2023 from 5.5% in 2018. “We expect Booking’s global OTA leadership position to expand over the next decade, driven by a superior position in China, continued leadership in Europe, and an expanding presence in vacation rentals, restaurant bookings, and attractions,” says a Morningstar equity report.

The operator’s formidable network of hotel properties and other services continues to “expand in both developed and emerging markets, as well as vertical markets such as vacation rentals and attractions,” says Morningstar equity analyst Dan Wasiolek, who puts the stock’s fair value at US$2,300.

The company’s expanding leadership in emerging markets, especially in China, is crucial as the Asia-Pacific region is projected to represent around one-third of total industry online booking growth over the next five years, he adds.