Travel Stocks Set to Go

The nation’s long staycation is over. Business travelers and families are grabbing their suitcases as the economy recovers. The rush will buoy the hard-hit travel industry.

More than half of corporate-travel managers expect their total travel spending to increase in 2010, according to a survey by the National Business Travel Association. An airline industry trade group, the International Air Transport Association, recently raised its forecast for 2010 passenger traffic growth from 4.5% to 5.6%. That compares with a 2.9% drop in 2009. And the Cruise Lines Industry Association estimates a rise of nearly 7% in passenger traffic for 2010.

Anticipating this, the Dow Jones Travel & Leisure Index is up 11% so far this year, compared with a 2% gain for Standard & Poor’s 500-stock index. The travel index has also outpaced the S&P since stocks in general began to rebound in March 2009. More than a handful of travel stocks have already more than doubled from their lows.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

For that reason, and because the industry is full of firms with debt problems -- we can’t say everything that floats or flies is a worthy investment. We prefer large companies with the money and capacity to defend their businesses from the industry’s notorious price competition and travelers’ fickle tastes. And as people try to avoid taking on any more debt, we also like companies that cater to value travelers. Here are four picks:

Carnival Corporation (symbol CCL), the world’s largest cruise operator, expects bookings to grow by 8% this year with actual prices (in an industry known for deals and discounts) rising by 17%. The company, with headquarters in Miami and London, boosted its own full-year earnings “guidance,” or estimate, from $2.10 to $2.30 per share to $2.25 to $2.35 per share. At their March 25 close of $38.54, Carnival shares were up 127% since the stock market bottomed in March 2009. That puts the price-earnings ratio at 17 times the $2.34 per share analysts call for the company to earn in the year ending in November 2010.

As more people go cruising, they’ll spend more aboard ship. Steiner Leisure (STNR) operates spas on 13 cruise lines, at 50 resorts and at 11 luxury hotels. Oppenheimer analyst David Katz points out that by buying shares of Steiner, you invest in cruises without worrying about a spike in fuel prices, which savages the shipowners’ profits. Steiner is poised to grow its hotel spa business with the January acquisition of Bliss World Holdings from Starwood Hotels & Resorts Worldwide, Katz says. He thinks Steiner could beat the average 2010 earnings estimate of $2.46 per share and that the shares are worth $51. The stock, at $44.45, trades at 18 times 2010 earnings estimates and has gained 81% over the past year.

Shares of online travel agent Expedia (EXPE) are stuck so far this year, down 10.8%. But look past the slump and you’ll find that the world’s largest online travel agency is expanding its international business. Plus, Expedia just initiated a cash dividend that, based on the stock’s current price, would yield 1.2%. As travelers continue to look for the best values, more business will be funneled through Expedia’s network of travel sites. At $22.88, Expedia shares trade for 14 times the $1.59 per share analysts forecast the company will earn in 2010. Priceline, Expedia’s rival, is a great company as well, but it trades for 23 times estimated 2010 earnings.

Southwest Airlines (LUV) is the standout company in a bad business for shareholders. Since 1947, the U.S. airline industry as a whole has racked up some $34 billion in net losses. But Southwest has been profitable for 37 years in a row -- notably in 2008, a brutal year for airlines. Expect the trend to continue as more budget-conscious fliers, turned off by baggage fees and other annoying charges levied by rival airlines, choose Southwest.

The major risk to Southwest, as with any airline, is fuel costs. Southwest has previously been smart at hedging oil costs and is hedging about 50% of its estimated 2010 fuel consumption against oil going as high as $100 a barrel. The stock, at $13.07, is up 161% from its March 2009 low of $5. It trades for 23 times the 57 cents per share analysts estimate the company will earn in 2010. Raymond James analyst Duane Pfennigwerth thinks Southwest shares are worth $15, and as recently as 2006, Southwest flew above $20.