Vacations Are Back, and So Are Travel Stocks

01/06/2011 11:11 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Disney and the airlines look like the best bets in a sector that’s hot but no longer cheap, writes senior editor Igor Greenwald.

The wanderlust is back. After three years of enforced “staycations” with relations, Americans are scrambling for airline seats, cruise ship cabins, and hotel rooms.
I was recently among the many grateful escapees and can report that the numbers don’t lie and that many planes and hotels are indeed sold out.

But don’t take it from me: Believe the stock market, which has doubled the value of Royal Caribbean (NYSE: RCL) shares in well under five months. MGM Resorts International (NYSE: MGM) is up 20% since Dec. 15 amid indications that gamblers are returning to the Las Vegas Strip. Call options on airline stocks were flying off the shelf Wednesday.

Also Wednesday, (Nasdaq: PCLN) launched 5% higher to a new 11-year peak. It’s Piper’s top large-cap tech pick for 2011 and rates a new Buy from Canaccord Genuity with a price target implying an additional 12% upside. Not too shabby for a stock selling for 47 times trailing earnings. Of course, the price:earnings ratio drops to 24 based on estimated 2011 earnings, and Priceline’s expected 34% profit growth this year is crucial to the travel discounter’s lofty valuation.

And then there’s Travelzoo (Nasdaq: TZOO), the publisher of e-mail bulletins on travel deals that fetched $14 per share in late August and is now above $44 after a 6+% gain on the day. The stock surged in October after the company once again trounced earnings expectations and has been on the move ever since, aided by Google’s (Nasdaq: GOOG) failed bid to buy Groupon for $6 billion. Like Groupon, Travelzoo does nothing others couldn’t copy, but enjoys a tremendous first-mover advantage. And rest assured that a nation grappling with cabin fever would much prefer to peruse pictures of sunny resorts to offers of discounted bowling fees.

Last but not least, there’s Walt Disney (NYSE: DIS), which is closing in on $40 for the first time in more than a decade after Goldman Sachs called it a “Conviction Buy,” while Morgan Stanley and Caris raised earnings estimates. We know anecdotally that Disney is busy. New Jersey Gov. Doug Christie was vacationing with family in Disney World while the post-Christmas blizzard paralyzed his state. The rescued Chilean miners will visit soon as well, the better to promote the resort to their compatriots.

Can the good times for the travel industry keep rolling? Disney is still priced at a reasonable ten times trailing cash flow, while competitors like Royal Carribbean and Carnival (NYSE: CCL) fetch comparable multiples of 12-plus.

On that basis, bargain-hunters might prefer Southwest Airlines (NYSE: LUV) at a mere six times cash flow despite a 20% increase in revenue in a year’s time. But if gasoline tops $4 a gallon and the unemployment rate doesn’t decline as rapidly as hoped, look out below.

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