What happened
Shares of hospitality stocks struggled again on Monday as coronavirus spreads across the U.S. and the world. Marriott International (MAR -0.91%) fell as much as 5.9% before recovering most of those losses by midday, while Carnival (CCL 0.43%) dropped up to 6.6%, and Eldorado Resorts (ERI) plunged as much as 14.2%.
Marriott and Carnival recovered to end up with only small drops today, but Eldorado really took a big hit. The casino company finished down nearly 9.5%.
Image source: Getty Images.
So what
Fear of COVID-19 is affecting the consumer travel and hospitality business. Bookings at hotels in Asia are down, and that's where a majority of the 90,000 reported cases and 3,000 reported deaths have happened. There have now been six deaths in the U.S., so the concern has hit U.S. shores.
For Eldorado in particular, the challenge is that it's trying to acquire Caesars Entertainment (CZR), in a $9 billion cash-and-stock deal. That deal could be harder to close if hotel occupancy and gambling are down throughout 2019. Coronavirus fears haven't hit casino stocks very hard yet, but that may now be changing.
The hospitality business is definitely the first to be hit by coronavirus fears, and we'll probably see a significant impact starting in the first quarter. But it'll take months to determine if travel will be slow all year or whether this is a short-term blip in results.
Now what
Investors are in a tough spot in hospitality stocks right now. On one hand, panic over a short-term drop in demand isn't the right course of action for any investment. On the other, there's concern that coronavirus has months of spreading before it reaches the entire U.S. and parts of the world it hasn't hit yet. That could mean both a protracted downturn in demand for hospitality services and an economic impact on hotels, cruise lines, and casinos.
I don't think there's going to be a quick recovery in the hospitality business, so I'd be wary of buying the dip today. If Asia is any indication, demand can drop very quickly for hotels and especially casinos.
Eldorado has a lot of questions to answer, given its already risky acquisition of Caesars entertainment. That's the one stock I think could have a significant downside during operations, even if it hasn't hit revenue or earnings quite yet.
