Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Jamie Katz. She is an equity analyst at Morningstar in Chicago. Hello.
Jamie Katz: Good afternoon.
Black: So, Jamie, you've been looking at the travel sector and I think this is an area that many investors are really interested in at the moment, not least because of their portfolios but also because of their summer holidays. What's been happening in the travel sector this year?
Katz: Yeah, I think one of the biggest constraints the travel sector has really seen this year has been from governments around the globe more or less shuttering the ability for consumers to travel as they've implemented stay-at-home orders. And while these stay-at-home orders seem to have largely worked where implemented like in the cases of China or Italy, where policies have been applied a little bit less consistently like in the U.S., the virus it seems like it's been a bit more difficult to mitigate. So, right now, as we think about travel, the key catalyst to restore demand to prior levels will come by way of a vaccine and we think that that will largely be distributed in the first half of 2021.
Black: And do you think this sector can recover or will many companies struggle to bounce back after so long in lockdown?
Katz: So, we did take a look back recently at past periods where there were either geopolitical or health shocks to the travel industry. And when we looked at years beyond, SARS or H1N1, the following years, 2004, 2010, they held pretty decent pricing for travel and leisure names and we looked at things like yields for the cruise lines, RevPar for the hotel, revenue growth. And so, those all did fairly well the next fiscal year. And if we think of the past as slightly indicative of what we could experience this go around, we think most of the companies in our travel and leisure coverage list should recover in roughly about three years. Passenger for air travel has already improved. The TSA basically said figures were more than 620,000 last week. That was up from less than 90,000 per day at the trough of demand. And so, while this is a lot lower than the year-ago period still, it does indicate to us that the willingness to travel is on the mend and that there will be a recovery in travel demand ultimately.
Black: Okay. So, with that in mind, can you talk us through a couple of the stocks that you do like in this space?
Katz: Of course. I think some of the more favorable trends are benefiting names like Wyndham, Choice Hotels, Norwegian Cruise Lines. There's been a pretty big valuation dislocation across the travel space and you can see that in the wide margin of safety between our intrinsic value and current share prices. And so, when we think about narrow moat Wyndham, we really think that its leading economy and mid-scale portfolio is going to outperform those higher price points during 2020 as the recovery is largely hinging on drive-to vacations rather than fly-to vacations. And we also like Wyndham because they do have one of the strongest balance sheets in the hotel industry. We did calculate recently that Wyndham has about three to four years of liquidity at current reduced demand levels and that should ensure that there is a ton of financial flexibility for that business.
We also like Norwegian. There is a lot of uncertainty around cruising and when that will restart. Most of the cruise lines are in pause until October 1st currently and that could impact near-term pricing. But I think when we look back prior to COVID-19, pricing was fairly stable for Norwegian and the last commentary that was offered was that when we looked ahead to 2021, the book position and the pricing was largely in line with historical ranges, so not going to be falling off materially. We think Norwegian's demand could be restored before some of its peers because it has a much smaller fleet, so easier to get back onto the seas. And they do still source a significant amount of consumers from North America. Obviously, Europe has some different mechanics going on in different economies there right now for demand concerns.
Black: Jamie, thank you so much for your time. For Morningstar, I'm Holly Black.
