Sector spotlight: travel and leisure (part one)

Of all the sectors that make up the UK stock market, few have had a more torrid time in recent weeks than the Travel and Leisure sector. But has the sell-off created bargains?

Article updated: 3 June 2020 11:00am Author: Michael Baxter

There are those who think that travel and leisure will never be the same. Maybe, but let’s face it, these activities do partly define us as human. To stop travel and leisure long term would be akin to stopping breathing — almost. We will travel again, we will engage in leisure pursuits again, and when this happens, some organisations may flourish.

Maybe, post-Covid, many will feel flushed with money. Savings rates have increased during the crisis or at least they have among those who have continued to enjoy an income comparable to the level pre-Covid.

Maybe, once the crisis is over we will all become Johnny Stay at Homes. Maybe kissing and hugging will be out, forever. Or perhaps we will want to celebrate.

I would not be surprised if post-Covid, all that pent up demand and frustration will give way to a mass need to blow off steam. Those organisations that can come through this crisis more or less intact may even boom.

So let’s have a look at some of the key players in this sector and see if we can spot any players who are dramatically undervalued by the markets.

Before I go any further, it is not for me to make investment recommendations. I can state the facts and give some opinion, but I leave it to you to join the dots and draw your conclusions.

So let’s take a look.

Today I look at six companies, next week I will take a gander at another six in this sector.

888 Holdings

Why should 888 suffer especially at the hands of Covid? Online gambling is not exactly a business that would suffer as a result of social distancing.

Part of its appeal is its dividend — around 3.5 per cent. When all around dividends are being slashed, 888 is something of a rarity — a company which has not significantly changed its dividend as a result of Covid. Furthermore, its dividend yield has been pretty constant during the last decade.

What I would say about this stock is that I don’t think its allure or otherwise has been noticeably changed by Covid.

You may like the company. You may have qualms about investing in a company in the business of gambling, but there is no obvious sign of a Covid related bargain share price or indeed ongoing collapse — more a case of business as usual. Of course, business as usual is such a rarity at the moment that this alone may make it appeal to some investors.

Period Share price
Current share price 156p
Year high 165p
Year low 70p
Five year high 311p (May 2018)
All-time high 311p
Market cap £575m
P/E 16.97p

Carnival 

I confess to a bias; I am not into cruise holidays. As a result, I am going to struggle to be objective here.

It seems to me that cruise holidays had become fashionable and fashions are fickle. Will they return to firmer glories, post-Covid? I doubt it, but then that’s me.

Many disagree. Carnival has successfully managed to raise money to shore up the balance sheet.

When the company recently announced a resumption of cruises later in the summer, customers orders came flooding in. Maybe I am wrong, and frustrated land locked wannabe holidaymakers will want to take to sea in big numbers soon. If so, then the P/E does look astonishingly cheap.

Period Share price
Current share price 1109p
Year high 3,645p
Year low 605p
Five year high 5,320p (2017)
All-time high Around 9,000p (2001)
Market cap £9.5bn
P/E 3.15p

Cineword

Do I wish I had bought into Cineworld back in March when shares were down to 21 (less than a quarter of the current price.)

I confess here to another bias, this time the opposite to the one above. I am a big fan of the cinema.

I think many of Cineworld’s critics failed to grasp a vital part of the cinema proposition. It is not in competition with Netflix et al., as critics say, instead it is complementary.

When the movies are big and must-sees, the cinema does well.

When the lockdown ends and cinemas open (I hear Cineworld could be opening in July) there will be an impressive line-up of releases. Cinema-goers will be spoilt for choice.

The risk with Cineworld relates to its debts. To some, it’s balance sheet contained the ingredients for disaster and Covid highlighted that risk. But a high proportion of its costs are valuable, just as revenue has fallen to I guess zero in recent months, its costs will have plummeted too.

Period Share price
Current share price 90.7p
Year high 220p
Year low 21p
Five year high 320p (2017)
All-time high As above (320p)
Market cap £1.24bn
P/E 8.48p

Compass Group

Compass Group is a contract caterer — the world’s biggest. Schools, colleges, hospitals and workplaces all contract the company.

Clearly, there hasn’t been much demand for its services during the Covid lockdown, although some organisations, such as hospitals, will have continued to employ its services.

The good news, from the point of view of shareholders, is that it has a strong balance sheet. Assets as at 30 September last year stood at £13bn (cash £398m).

The company does have £3.7bn in borrowings, which given profits after tax of around £1.1bn last year does not seem too onerous.

Compass is generally regarded as a defensive stock and of economic recovery post-Covid is weak, as many expect, defensive shares may well be worth including in your portfolio.

Period Share price
Current share price 1,220p
Year high 1,990p
Year low 1002p
Five year high 2007
All-time high As above (2007)
Market cap £31.78bn
P/E 18.81p

Easyjet

At one point, I thought that easyJet, along with Ryanair would benefit from Covid long term as the crisis would create an industry shakeout, leaving a relatively open market for strong airlines.

But I hadn’t counted on government bailouts. This is why private airlines struggle to make money long-run; they compete with state-owned airlines.

Highly indebted (as are most airlines) I think it has got challenges ahead.

Will we be holidaying abroad in a hurry post-Covid? I have my doubts.

Apart from anything else, a slow economic recovery may restrict consumer spending on big-ticket items such as holidays abroad.

Business travel will surely be hit — remote working looks to have become a permanent shift.

Then again, shares do look cheap. Sometimes, though, they can be cheap for a good reason.

Period Share price
Current share price 690p
Year high 1,517p
Year low 497p
Five year high 1,858p (2015)
All-time high As above (2015)
Market cap £2.7bn
P/E 7.85p

Intercontinental Hotels

Holiday Inn and Crown Plaza are among Intercontinental Hotel brand names.

Paying out an okay dividend yield of around 2.5 per cent and dividends have been steadily growing for years.

But will Covid create a hotel hit? Even if you think holiday stays will return to pre-Covid legend, I worry about business travel in the zoom age — will we travel long distances for meetings and conferences when we have woken up to the ease of video conferencing and webinars?

Period Share price
Current share price 3,968p
Year high 5,223p
Year low 2,385p
Five year high 5,590p (2019)
All-time high As above (2019)
Market cap £7.25bn
P/E 23.23p

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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