As everyone knows, the travel and leisure industry is in the dumps right now as a result of the COVID-19 pandemic. Yet better therapeutics are coming to market every day, and with each passing day, we are getting closer to a vaccine. Bill Gates believes there could be vaccine approvals as early as December or January, meaning the pandemic could end by mid- to late 2021.
There is likely a lot of pent-up demand for travel after a year of restricted movement. Given the run-up in "stay-at-home" stocks this year, investors may wish to look at high-quality travel and leisure stocks that are still down on the year.
MGM Resorts International
Barry Diller's IAC/InterActiveCorp (NASDAQ:IAC) recently took a 12% stake in MGM Resorts, and it wouldn't be a bad idea to follow this smart investor into the stock as well. Not only should IAC help grow MGM's digital offerings in i-gaming and online sports betting, but MGM's core casino properties appear quite cheap as well.
MGM's casinos consist of 35% of rooms on the Las Vegas strip, along with many regional casinos and two properties in Macau. In 2019, MGM achieved adjusted EBITDAR of over $3.3 billion and free cash flow of about $1.1 billion, versus a market capitalization of just $10.5 billion, and an enterprise value of $25.7 billion. That's just a 7.7 EV/EBITDA multiple and a 10 times cash flow multiple based on last year's earnings.
New CEO Bill Hornbuckle just took the top role as CEO and appears to be doing a good job conserving cash in the new depressed environment. Of the properties that were gradually reopened in the second quarter, almost all generated positive cash flow, even with 30% occupancy during the week and 50% occupancy on the weekends. The company is also implementing a $450 million cost-saving plan this year, which should stick around even when traffic returns.
Not only should the core properties bounce back strongly once the world gets a vaccine, but MGM should also benefit from the expansion of i-gaming and online sports betting across America. MGM's BetMGM app should benefit from MGM's casino presence across the country, as well as its 34 million-plus M-Life rewards members it can reach via digital channels. BetMGM is already live in seven states, on its way to 11 by the end of the year, with market access in 19 total states.
With a cheap stock just in relation to its core casino business, as well as hidden potential upside from BetMGM and IAC's involvement, MGM looks like a promising turnaround pick in the travel sector today.
Most investors know the Walt Disney brand and its impeccable record of value creation over time. Yet Disney's stock is still off almost 20% below its all-time highs set back last December.
Disney is facing extreme difficulty in three out of its four main divisions, including the media networks division tied to the traditional TV bundle, its parks and experiences division, and its studio entertainment division that gets a significant portion of revenue from theatrical distribution. Disney isn't 100% a "travel stock," of course, but its parks, experiences, and products segment was its highest-revenue division last year.
However, the company is doing a good job of adapting to these times. Disney has cut costs and began a phased reopening of some of its parks this summer. Walt Disney World reopened at lower capacity with a positive contribution margin even low attendance levels and with added safety protocols. Disney also decided to experiment by releasing Mulan as a premium video on demand offering through Disney+, as a theatrical release wasn't pragmatic. The result: Disney was able to eke out $1.1 billion in operating income last quarter, when factoring out a non-cash $5 billion impairment charge, even with all of the headwinds.
And of course, Disney really appears to be succeeding with its fourth division, its direct-to-consumer division, including Disney+, ESPN+, and Hulu. On the recent conference call, new CEO Bob Chapek revealed Disney+ had 60.5 million subscribers as of Aug. 3, and Hulu subs were up 27% year over year to 35.5 million as of the end of last quarter. And Disney+ hasn't even rolled out to many markets yet, including the Nordics, Portugal, and Latin America, which will be forthcoming this fall. Chapek noted, "As our global sub numbers continue to grow, we've also exceeded our internal subscriber projections in every major market we've launched thus far."
Consumers clearly love Disney's brand. Since the company is operating in the black even in this COVID environment, investors don't have too much to fear as they wait for a turnaround across Disney's cable, parks, and studio businesses. Meanwhile, the company looks as if it's going to be a force in streaming over the long term.
Finally, online travel agency (OTA) Expedia looks like another solid bet to play a travel recovery. Expedia is one of two large OTAs in an oligopolistic industry. Its platform consists of brands Expedia, Orbitz, Hotels.com, Vrbo, Travelocity, a majority stake in hotel booking site Trivago (NASDAQ:TRVG), as well as other properties.
The company is fortunate to have private vacation rental site Vrbo on its roster, as that brand has been a hit as consumers look for drive-able private vacations that avoid hotels.
In addition to a mere recovery in travel, Expedia is also a self-help story. After years of underperformance, large shareholder Barry Diller (of IAC fame mentioned at MGM) ousted the former CEO and recently installed longtime lieutenant Peter Kern in the lead role. The team is implementing a $500 million cost-cutting program this year, which would be a huge reset in the company's cost structure, considering Expedia made $565 million in net income in all of 2019.
Like many hard-hit travel companies, Expedia had to raise money earlier this year, but it found cash not only in the debt markets, but also via a preferred stock investment from private equity firms Apollo Global Management and Silver Lake Partners, who now also have seats on Expedia's board of directors.
With major cost cuts already taking place under a new CEO, ample liquidity, and some very smart and highly invested investors on Expedia's board, the online travel agent should be a much leaner and meaner company exiting the pandemic. Despite already more than doubling off its March lows, Expedia is still well below its all-time highs, which it should exceed some time in the future, as long as we get a vaccine.