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A Slow Thaw for Travel and Leisure Stocks

Although vacation bookings are rising with optimism about the economy, prices for hotel rooms and cruises will need time to rebound

With the worst of winter's weather apparently over, spring break and summer getaway destinations are beckoning. If you really want to take the pulse of American consumers amid nagging doubts about the economic recovery, check out their vacation plans. That kind of big-ticket item—among the most discretionary of purchases—shows how much confidence people have in their future. "When it comes to vacations, when consumers are as traumatized as they were in the fourth quarter of 2008, all major purchases are put on hold. A vacation for most people is a major purchase," says Sharon Zackfia, an analyst who covers cruise lines for William Blair. "Until people felt better about their 401(k)s and job security, you had to wait." Vacation bookings started to pick up in November and have accelerated so far this year, according to travel agents and analysts. That's largely due to growing confidence in the economy, says Robert Zavala, president of Freedom Vacations, a Downey, Calif., travel company. Bookings at dude ranches in the western states are materially better this year than in 2009 but nowhere near 2008 levels, says Bill Bryan, chairman of Off the Beaten Path, a Bozeman, Mont., company that specializes in adventure travel packages. As of Mar. 1, total business for the 10 tour operators that comprise the Adventure Collection, of which Bryan serves as vice-chairman, was up 23% from a year ago, but Bryan doesn't expect business to rebound to 2008 levels until sometime in 2011. slim booking window triggers bargains

In the cruise business, consumer confidence is measured by how far in advance people book travel, which is called the booking window. This measure contracted to as little as two months in late 2008, vs. an historical average of six months. Now it has returned to about five months, says Steven Wieczynski, an analyst at Stifel Nicolaus (SF) who covers cruise lines and gaming. A sharp narrowing of the booking window such as the one that occurred last year translates into big discounts on prices because cruise ships like to sail full, says Zackfia at William Blair. The booking window remains around two months for cruises that depart from South Florida and Puerto Rico, says Victor Valverde, owner of Cruceros To Go in San Juan, P.R. Currently, you can get a seven-day cruise out of San Juan, Fort Lauderdale, Fla., or Miami for $500 to $600—"unheard of" just a few years ago, when the cost was typically between $700 and $800, he says. South Florida offers the biggest discounts because there is such a glut of available ships there, he adds. Prices for summer cruises seem to be running 5% to 6% higher than in the summer of 2009 but remain below 2008 levels, and prices for longer, more expensive cruises are rebounding more quickly than those for shorter ones, says Zackfia. Most Alaskan cruises slated to sail between May and July are already sold out, she adds. Carnival (CCL) said during an earnings conference call in December that its bookings were up 40% from a year earlier and business likely had improved further by January, when Royal Caribbean Cruises (RCL) reported its latest results, says Zackfia. She upgraded both stocks to buy in March 2009 and believes that both companies are still in the early stages of a price recovery around itineraries. The stock prices aren't reflecting this yet, but eventually they will follow, she says. Vegas Midweek room rates have plunged

The outlook is much gloomier for the gaming industry. The main problem Las Vegas faces is a lack of convention business, says Wieczynski at Stifel. Convention attendance fell nearly 24% from 2008, to 4.5 million for all of 2009, according to the Las Vegas Convention and Visitors Authority. Some improvement is projected to come later in 2010, says Wieczynski, but he warns against expecting it to return to normal levels for a couple of years.

The lack of bulk business has put considerable pressure on hotel-casinos' midweek room rates. A couple of years ago, they were charging $250 to $350 per night midweek and now they're getting only $100 to $150, he says. Regional gaming properties have seen visitation and play levels flatten out after play levels had dropped 25% to 35% from peak levels in 2006 and 2007, Wieczynski says. Regional operators such as Isle of Capri Casinos (ISLE), Penn National Gaming (PENN), Ameristar Casinos (ASCA), and Pinnacle Entertainment (PNK) get 80% of their revenue from gaming and the rest from food and beverage and retail sales, while Las Vegas casinos are now getting 65% of their revenue from nongamimg sources and just 35% from gaming, he says. Isle of Capri on Feb. 23 reported a net loss of 33¢ a share for its fiscal third quarter, which ended on Jan. 24, vs. a profit of $1.45 per share a year earlier. The company blamed a 25% drop in revenue from a year ago on unemployment rates that averaged from 7% to 9.2% in its operating areas—Missouri, Iowa, Louisiana, and Florida—and said that while more new customers are visiting, spending per visit is down. For big hotel chains such as Sheraton, owned by Starwood Hotels & Resorts Worldwide (HOT), and Marriott (MAR), leisure travel accounts for roughly 10% to 15% of their total revenues, says Patrick Scholes, an analyst at FBR Capital Markets (FBCM). The meat of their business comes from properties in downtown urban areas that rely mostly on individual business travelers and corporate group events, he says. Interval generating lots of cash

Smith Travel Research's latest data shows that domestic hotel occupancy and room rates have begun to rebound from a year ago. February 2010 occupancy was up about 0.4% from a year earlier to 53.2%, while average daily room rates were roughly 5% below year-ago levels, as luxury and upscale properties cut prices further to attract travelers. Revenue per available room, which is affected by occupancy and daily room rates, dropped 4.3% from a year ago. STR forecasts that the occupancy rate for 2010 will be flat, following 55.1% for 2009, while the average daily rate will be down 3.2% from last year. On Feb. 3, Standard & Poor's analyst Mark Basham reiterated his negative outlook for the industry. The lodging companies most dependent on leisure travel are Wyndham Worldwide (WYN), whose brands include Ramada, Days Inn, and Super 8, and Interval Leisure Group (IILG), which has the advantage of low overhead costs because it simply helps people who own time shares in various properties exchange them for a fee, says Scholes at FBR. In a Nov. 13 research note, Scholes estimated that Interval would generate $70 million of free cash flow in 2011 for a yield of 11%. The company won't disclose its plans for the cash, but Scholes believes reducing debt will be its priority. A share buyback program or a move to start paying cash dividends are additional options, he wrote. In the last quarter, Interval repaid $8 million, or 2%, of its total debt, and boosted its cash balance by $4 million to $153 million, or $2.70 a share, the note said. The value of Wyndham's shares has jumped eightfold from a year ago, finishing at 24.01 on Mar. 5. Interval's stock price has quadrupled over the past year, closing at 15.38 on Mar. 5. Interval's stock still has room to grow in line with investors' appreciation for the strength of the company's cash flow generation, says Scholes. Travel web sites such as and others that comprise The Away Network, owned by Orbitz Worldwide (OWW), are attracting more visitors and selling more ads amid an upswing in price comparisons for everything from flights to hotels to car rentals, says Eric Brodnax, vice-president and general manager of The Away Network. "People want to make sure they've found the best deal on what they're doing," he says. "They know this is a significant expense and they want to make sure they're not overpaying for it."

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