A drop in coronavirus cases in the U.S. and an increase in vaccination are two big reasons to be optimistic about the future of travel stocks. The pandemic isn't over, but the situation is improving -- and that means we can better estimate when certain companies will recover.
Here, I'll talk about two of my favorites. One is an entertainment giant with good news only a month away. Another is a cruise operator whose recovery will take more time. But once the pandemic is over, this company may see a tidal wave of demand. Let's take a look at each.
Image source: Disney
Disney
The pandemic has weighed on Disney's (DIS 0.15%) biggest moneymaker: its parks, experiences, and products segment. That's because the outbreak led to temporary park closures. The Magic Kingdom in Florida, for instance, was closed for about four months last year. Even worse, Disneyland and Disney's California Adventure park have been closed for more than a year. Now, though, the magic is on the horizon. The California parks are set to reopen on April 30.
Like the Florida parks, the California ones will face capacity restrictions. But here's the good news: Even at reduced capacity, Disney says revenue generated at its open parks has more than covered the costs of opening them.
As I mentioned, vaccination is picking up. In fact, President Biden has vowed to vaccinate every American who wants a jab by the end of May. This and the lower number of cases should boost people's confidence about traveling -- and visiting theme parks. Of course, we can't expect revenue to reach pre-pandemic levels right away. But this is an important first step in the right direction.
Carnival
Carnival (CCL +0.29%) (CUK 0.21%) isn't out of the woods yet. The company's Italian line Costa Cruises just delayed the restart of its operations to May 1. This follows rising cases of COVID-19 in Europe and lockdowns in various countries there.
In the U.S., the Centers for Disease Control and Prevention (CDC) established a conditional sailing order last year. It includes a list of requirements cruise lines must meet before returning to the waters. The order remains in effect through Nov. 1.
"We continue to work diligently to resume operations in the U.S., including ongoing discussions with the CDC," Carnival wrote in its annual report released earlier this month.
Even though the travel environment is improving in the U.S., health officials are cautious about giving cruises the green light. The CDC still advises people to avoid cruises worldwide, citing an increased risk of contracting COVID-19. So it will take a while for cruise ships to set sail. But here's the good news: Carnival had $9.5 billion in cash at the end of 2020. Importantly, the company says it has enough liquidity to keep the business going through 2021.
I'm not really expecting a recovery this year, even if sailings restart in some areas. Instead, I'm looking to next year and the year after. It's clear travelers are eager to get back on board. For example, earlier this year, Carnival said advance bookings for the first half of 2022 surpassed those of that period in 2019. And Carnival notes it hasn't even done much advertising.
What this means for investors
Now is the time to start looking at travel stocks again -- ahead of eventual rebounds in earnings and share prices. Of course, it's crucial to look at your risk tolerance and investment horizon.
At this point, Disney isn't as risky as Carnival -- even though the stock price is close to its all-time high. Many of Disney's parks are operating. And it generates revenue through other businesses such as its streaming services and cable networks. Disney shares may not gain in leaps and bounds from here. But I expect they'll rise gradually over time.
Carnival's operations still are on hold. That represents a cost for the company and risk for the investor. But the stock is trading at about half of its average price over the 2017-through-2019 period. And it's trading at about 5 times earnings, compared with more than 12 in 2019. So if you have a long-term view and can tolerate risk, now may be the time to consider shares of this travel stock.
