The Weather Clears For Travel And Leisure Companies

They're ordering room service at the Ritz-Carlton Atlanta, queuing up at the first-class-ticket counters in Chicago's O'Hare International Airport, and sending in reservation forms for that big trade show in Las Vegas. They are the world's business travelers -- and after a three-year hiatus, the road warriors are venturing forth again, breathing new life into the beleaguered travel business.

While they stayed home, a lot changed. Travel operators cut their costs and trimmed their capacity. Major airlines have parked rows and rows of planes in the desert. And the number of hotels under construction has fallen to half of the 1998 high. So companies should make a lot more money in 2004 as those full-fare business customers start whipping out their corporate credit cards again.

Hotel chains have already begun to see their room rates and occupancy levels creep up. Joseph Greff, a leisure-industry analyst at brokerage firm Fulcrum Global Partners, likes Hilton Hotels Corp. (HLT ). Like many travel stocks, it has already bounced off its lows, but Greff sees still more gains ahead. Hilton gets about 60% of its revenue from hotels such as New York's Waldorf-Astoria and the Palmer House in Chicago. With those destinations seeing more business travelers, he figures Hilton should earn 50 cents a share in 2004, up from 37 cents in 2003.

Canadian operators hit by the SARS scare in 2003 could bounce back even more strongly. Greff expects a sharp earnings increase at Fairmont Hotels & Resorts Inc. (FHR ), whose Bermuda resorts were also hammered by Hurricane Fabian. Created by the 1999 merger of Fairmont Hotels and the old Canadian Pacific Hotels & Resorts chain, the Toronto-based company now manages 81 luxury hotels. Greff figures that its earnings should more than double in 2004, to $1.05 a share. He recently lifted his price target to $32 a share, about 18% higher than where it traded in mid-December.

Gaining altitude

Airlines should see earnings take off. Deutsche Bank Securities (DB ) analyst Susan M. Donofrio is recommending Continental Airlines Inc. (CAL ). She believes the Houston-based company's continued focus on cost controls is showing results. The carrier turned profitable in the third quarter of 2003 and could earn $1.20 a share in 2004. Donofrio also likes Delta Air Lines Inc. (DAL ), which has boosted its revenues faster than its peers. She expects the company to win wage concessions from its pilots next year. Delta will still lose about $2.40 a share in 2004, by her estimate, but that's considerably better than 2003's estimated $8.70 loss. The company's recent launch of the low-cost Song airline should also make it more competitive.

Hotels and airlines aren't the only ways to play the travel rebound. Derek Rollingson, manager of the $90 million ICON Leisure & Consumer Staples Fund (ICLEX ), thinks he has found value in restaurant stocks. One of his top holdings is Ruby Tuesday Inc. (RI ), a 600-unit chain of casual-dining restaurants based in Maryville, Tenn. To attract health-conscious diners, the company began cooking in low-fat canola oil and serving more than 30 low-carb dishes. Rollingson figures that Ruby Tuesday's earnings will grow 15% a year for the next five years. But with the stock at around $28, it trades at a third less than his estimate of its value.

Car-rental stocks should benefit from the upturn in airline traffic. Daniel Dykens, portfolio manager at Clipper Capital Management in Boston, is a big fan of Dollar Thrifty Automotive Group Inc. (DTG ). The Tulsa-based chain managed to stay profitable while rivals went bankrupt, thanks to its focus on leisure travelers who rent for longer periods and a dominant position in the Orlando, Fla., market. The company lately has been using excess cash to buy back shares and independent franchises. Dykens says its earnings could nearly double in 2004, to $2.20 a share.

It has been a tough few years for the travel-and-leisure industry. But 2004 looks much more hospitable.

By Christopher Palmeri

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