NEW YORK (Reuters) – Investors are looking to next week’s earnings reports from hotels, cruise lines and other companies hard hit by COVID-19 for indications as to which companies could recover first when the pandemic recedes.
For nearly a year, money managers have largely looked to past earnings in the travel and leisure sector, where coronavirus-induced lockdowns and travel restrictions battered companies’ businesses and crushed their stock prices: shares of Marriott and Norwegian Cruise Lines, for example, have fallen 12% or more in the past year, compared to gains of nearly 17% for the S&P 500 through Friday afternoon.
However, next week’s numbers could provide clues as to which companies are in the best financial health and profit the most from economic reopening, while also allowing investors to better gauge where companies should be valued.
“Results across the board will be bad, but it’s really about who comes back,” said Adam Trivison, a portfolio manager at Gabelli Funds.
The focus on travel and leisure businesses comes as investors broaden their judgment on the effectiveness of the US vaccination efforts and the extent to which it will get the economy back on track.
The White House announced on Feb. 2 that it will begin shipping vaccines directly to pharmacies, in addition to regular deliveries to states, increasing weekly deliveries of shots to 11.5 million. The Centers for Disease Control and Prevention estimates that about 10.5% of the U.S. population had received at least one of the two injections required for complete vaccination through February 11.
Will Hilkert, portfolio manager of the Fidelity Select Leisure fund, said the earnings results over the next two quarters will serve as an underbelly check for investors who had bet on the leisure sector as a game for the reopening of the economy.
“Over the next six to nine months, you will have the opportunity to ensure that what you think the world will be like after the pandemic is matched by the fundamentals of the company,” he said.
Hilton Worldwide Holdings Inc and Hyatt Hotels Corp are expected to publish their results on February 17, followed by Marriott, Norwegian Cruise Lines and TripAdvisor on February 18.
Trivison, of Gabelli Funds, said he will keep an eye on hotel bookings in the group meetings, which he expects will provide clues over the next week on the extent of employee travel. Business travelers typically make up 25% of a hotel chain’s customers, although that number may be higher in destinations such as Orlando and Las Vegas.
Historically high valuations in the hospitality industry may give some potential investors a pause before buying at current levels, said Daniel Kane, a portfolio manager at Artisan Partners who bought Marriott stock while the stock fell in March and April.
Most hospitality stocks are now trading based on estimates of their results for 2023, pushing their current valuations well above their long-term averages, said Robin Farley, an analyst at UBS.
Marriott, for example, is trading at a price decline to a profit multiple of 240.7, while Hilton is currently unprofitable, but is trading at 515.7 of current fiscal year earnings, according to Refinitiv data.
Cruise lines are not expected to return to profitability until 2022, when most international travel restrictions need to be relaxed. Norwegian, for example, is trading at 35.2 times its estimated 2022 earnings, while Royal Caribbean is trading at 40.4 times its 2022 estimated earnings, according to Refinitiv. Marriott traded at a trailing price / earnings ratio of about 16 before widespread economic restrictions were introduced in March.
Chris Terry, a portfolio manager at Hodges Funds, scaled back a position in Norwegian after the company’s stock surged following vaccine approvals. He now looks like the company is showing a step-by-step improvement in its upcoming earnings report to confirm that the company is recovering.
“If we go back a year ago, the quarterly earnings were actually irrelevant,” he said. “Now we want to see progress on the timetable to meaningfully get the revenues back to where they were.”
Reporting by David Randall; Adaptation by Ira Iosebashvili and Nick Zieminski