Does Priceline or American Airlines Belong in Your Portfolio?

The right consumer-service companies can turbo-charge your portfolio.

Jun 26, 2014 at 5:42PM

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some consumer-services companies to your portfolio but don't have the time or expertise to hand-pick a few, the iShares U.S. Consumer Services ETF (NYSEMKT:IYC) could save you a lot of trouble. Instead of trying to figure out which stocks will perform best, you can use this exchange-traded fund to invest in lots of consumer-services companies simultaneously.

Consumer-services companies have an advantage over many other companies that we might consider for our portfolios because they tend to be businesses with which we are already familiar. Most folks know little about the biotechnology or industrials industries, for example, but we do have some experience with travel, restaurants, and retail. Thus consumer-services companies are a great place to start looking for investments.

The ETF's Basics
ETFs often sport lower expense ratios than their mutual fund cousins. ETFs often sport lower expense ratios than their mutual fund cousins. This ETF has an expense ratio -- an annual fee -- of 0.46%. It has outperformed  the world market over the past five and 10 years.

On your own you might not have selected American Airlines Group Inc (NASDAQ:AAL) or Priceline Group Inc (NASDAQ:PCLN) as consumer-services companies for your portfolio, but this ETF included them among its nearly 200  holdings.

A closer look at American Airlines Group
The airlines industry has long been an extremely tough one, with challenges such as bad weather, volatile fuel prices, fare wars, empty seats, difficult logistics, and more. Few companies in it have strong long-term track records, but American Airlines Group, the result of a recent merger between American Airlines and US Airways, seems to have one in progress, averaging annual share-price gains of about 80% over the past five years.

What's up? Well, along with its peers, it has been engaging in consolidation, which reduces competition and tends to thereby allow greater pricing power. The new American Airlines is the world's largest, with  "nearly 6,700 daily flights to more than 330 destinations in more than 50 countries and more than 100,000 employees worldwide." Still, while margins have been inching up, the company remains free-cash-flow negative, in part due to hefty debt repayments topping $3 billion in the past year.

On the plus side, though, it recently reached an agreement with its machinists union that's a necessary step toward integrating the workforces of US Airways and the earlier American Airlines entity. (The flight attendant unions from both companies, however, are looking to merge, which could give them more power.) Meanwhile, management, after reporting 2% year-over-year gains in both capacity and total revenue passenger miles for May, has raised near-term revenue-growth projections.

Despite the company's recent heady gains, investors should tread with caution. Remember that a rapid growth rate will be hard to sustain, as customers aren't likely to suddenly travel twice as much. Also, there remain the usual challenges as well as meaningful competition -- which is seeing an opportunity as the major airlines focus more on capacity discipline instead of capacity expansion.

A closer look at Priceline Group
Priceline has been great to long-term shareholders, averaging annual growth of 46% over the past decade. It began by offering a way to secure good prices on airfares and has since been expanding. Hotel bookings now make up the biggest piece of its revenue pie, and Priceline offers car rentals and cruises, as well.

The company just bought restaurant reservation specialist OpenTable (NASDAQ:OPEN), too. Some have balked at the $2.6 billion Priceline paid for OpenTable, but a look at other alternatives in the restaurant realm suggests it was a promising buy. After all, Priceline boasts more than a million guests, on average, per night in 480,000 properties around the world. That's a lot of potential for restaurant reservations.

In Priceline's last quarter, revenue surged 26% year over year, topping expectations, while adjusted earnings per share jumped 36%. Gross travel bookings rose 34%, with management citing continued growth in established markets such as North America and Western Europe, as well as solid early growth in newer markets such as Eastern Europe and the Asia-Pacific region. Management projected that gross bookings for the second quarter would grow by 22% to 32%, which worried some, as it's below recent growth rates. It bears remembering, though, that as companies grow larger, it's natural for growth to slow somewhat. And that may not happen to a great degree anytime soon, as Priceline has a history of underpromising and overdelivering. There remain risks, though, of course. For one thing, Google has been sniffing around, recently buying a hotel-booking software start-up.

With a forward P/E ratio below 20, Priceline stock seems to have more room to run. Its net margin was recently about 28% and has been growing.

The big picture
It makes sense to consider adding some consumer-services companies to your portfolio. You can do so easily via an ETF. Alternatively, you might simply investigate an ETF focused on consumer-services companies and then cherry-pick from its holdings after doing some research on your own.

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Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, owns shares of Google (C shares) and Priceline Group. The Motley Fool recommends Google (A shares), Google (C shares), and Priceline Group. The Motley Fool owns shares of Google (A shares), Google (C shares), and Priceline Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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