A Suitcase Full of Travel Bargains

Morgan Stanley's Michael Happel is loading up his portfolio now for an eventual upturn. Among his picks: Host Marriott and Harrah's

By Gene Marcial

Are travel-related stocks still too hot to handle? With the volume of travel significantly down since the September 11 terrorist attacks, shares of lodging and gaming companies were among the groups that investors quickly abandoned. In the first week of trading after the market reopened on Sept. 17, lodging stocks were pushed down an average of 34%, while gaming shares dropped an average of 24%.

Some have since recovered part of their losses: Among hotel stocks, Hilton Hotels (HLT ), which had plunged from 11 a share to 6.70 during the week, is currently trading around 8.50. And among gaming shares, MGM Mirage (MGG ), which had dropped from 28 to 17, is now at 22.

However, confidence in the group is still low, mainly because of continued fear that another terrorist attack could occur anytime. But some daring pros have been accumulating shares for the long pull, arguing that the fall in prices presents a good buying opportunity.


  "There are some very good buying opportunities for investors willing to hold these stocks for 12 to 24 months," argues Michael Happel, an analyst who tracks lodging and gaming stocks at Morgan Stanley. The upside potential for some of them, he says, exceeds the downside risk, "even if we assume that the economy is going into recession and that people will be traveling less in the future."

He believes that demand for lodging and gaming will begin to normalize within the next 12 to 24 months and that the companies Morgan Stanley follows "will remain solvent." If he's right, many lodging and gaming stocks could jump by 50% to 100%, figures Happel.

Based on a "discounted cash-flow analysis" and reasonable price-earnings ratios on their "normalized" earnings, Happel says many of these stocks are cheap relative to their instrinsic value (current value of future cash flows).


  Among lodging shares, Happel estimates that Host Marriott (HMT ), currently trading at 7.50, has an upside potential of 143%. And among gaming shares, he figures that Park Place Entertainment (PPE ), now trading at 7.55, could go up as much as 106%. These estimates are based on his discounted cash-flow analysis and assume that the stocks eventually trade up to their intrinsic values.

Investors should start accumulating a portfolio of lodging and gaming stocks, advises Happel, who thinks that in coming months, data will show that people have started to travel more. "This should serve as a catalyst for the stocks," he says.

Happel acknowledges that the level of uncertainty surrounding the travel industry is "unusually high," partly because chances are good that the economy is headed into a recession -- if it hasn't already. "And we can't rule out the possibility of more terrorist attacks in the U.S.," he adds. But those reasons don't deter him from being bullish on the group.


  For investors who want stocks with less risk than others in the current period of uncertainty, Happel recommends shares of lodging and gaming companies that were least affected by the September 11 attack. They include Argosy Gaming (AGY ), currently trading at 26, and Harrah's Entertainment (HET ), now at 26. These stocks, says Happel, could be "safe haven" opportunities for investors who want to avoid the companies that have been significantly affected by terrorist attacks.

Among the hotel stocks, companies that have suffered "a low impact" from the attacks are Extended Stay America (ESA ), now trading at 14; Choice Hotels International (CHH ), now at 17; and La Quinta Properties (LQI ), now at 4.30.

The Morgan Stanley analyst thinks FelCor Lodging Trust (FCH ), currently trading at 14, Host Marriott, and MeriStar Hospitality (MHX ) now "look very cheap." It's quite possible that these companies' dividends will be cut, says Happel, driving down their prices even more. But that, he argues, would be the best time to buy them.

Marcial is BusinessWeek's Inside Wall Street columnist

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