Perhaps no sector of the economy was hurt worse during the pandemic than travel.
Quarantines and stay-at-home orders caused demand for travel to all but evaporate, leading to grounded planes, empty hotel rooms, and a glut of rental cars. As revenue dried up, some companies were unable to tread water, leading to a spate of bankruptcy filings.
Times were tough, but some companies have been able to withstand the headwinds and some actually appear to have improved their competitive positions during the COVID-19 crisis. Here's why three Fools have high hopes for AerCap Holdings (AER +0.71%), Airbnb (ABNB +0.89%), and Carnival (CCL 2.74%) (CUK 2.81%) coming out of the pandemic.
Image source: Getty Images.
The market was wrong to panic about this aviation company
Lou Whiteman (AerCap): AerCap isn't an actual airline, but it does rely on aviation for its revenue. When the pandemic first hit back in the spring of 2020, AerCap shares tumbled nearly 75% -- worse than many of its airline customers.
Investors had good reason to panic. AerCap is in the business of buying planes and leasing them back to airlines. It's a profitable business when times are good, but it involves taking on a massive amount of debt. The markets were concerned that with airlines suddenly unable to pay their bills, AerCap's balance sheet would collapse, potentially leading to a bankruptcy filing that would wipe out equity holders.
But the markets underestimated AerCap's wherewithal, including ample amounts of liquidity and a relaxed debt repayment schedule. AerCap flew through the crisis, and earlier this year it negotiated a $30 billion deal to acquire the aviation finance arm of General Electric; the acquisition will nearly double the size of its portfolio.
The deal will combine the world's two largest leasing portfolios, creating a powerhouse lessor that will rank as the largest customer for both Airbus and Boeing, and which will have considerable negotiating power when buying new planes.
The pandemic caused an acceleration in the trend of airlines relying on lessors for new planes instead of buying outright. Carriers had to take on billions in new debt to ride out the crisis, and they are currently ill-positioned to take on additional liabilities to fund new plane purchases. Airline investors seem to like the asset-light model, meaning AerCap and other lessors should see an increasing amount of business coming their way in years to come.
AerCap shares still trade at a 15% discount to where they were prior to the pandemic, despite the company proving its resilience during the worst aviation downturn in history and the progress the company has made building its business. If you are bullish on air travel but skittish about tying up capital in any one particular airline, AerCap is a solid way to invest in the recovery without having to pick a winner among air carriers.
Rising in the wake of catastrophe
Rich Duprey (Carnival): It wasn't exactly easy sailing through the pandemic for Carnival, but the market believed the cruise ship operator was going to be able to sail through the storm and largely be shipshape when it came out the other side. Carnival is only just getting its sea legs again, but the cruise line is doing surprisingly well for itself.
Make no mistake, there are still rough seas ahead as Carnival took on billions of dollars in debt to survive the crisis. It ended the second quarter with almost $26 billion in long-term debt, more than double where it stood before the outbreak, $1.7 billion in payments on long-term debt due within a year, and over $3 billion in short-term borrowings, meaning it has a deep draft in waters that are still relatively shallow in terms of cruises that people will be taking. There's also concern the Delta variant of COVID-19 could sink the cruise industry's nascent recovery.
Yet, there's also a lot of hope for the future. Demand for voyages is surprisingly strong. President and CEO Arnold Donald said Carnival barely did any advertising, but "we continue to experience an acceleration in booking trends globally, including capturing significant latent demand for our new sailings opening this summer." More importantly, bookings for 2022 are ahead of where they were in 2019, which was a historically high period for the cruise line.
Image source: Carnival.
Carnival has plenty of cash available to it, some $9.2 billion in cash and short-term investments, which it acquired from the debt it took on, but it also allows it to get back up to full speed very quickly. It's the largest cruise operator in terms of revenue, fleet size, number of passengers carried, and the number of cruise brands it offers to passengers, ensuring it is able to capture all segments of the cruising population.
Even though it had no business to speak of for around 18 months until it was allowed to put its oars in the water again, Carnival's stock is up 56% over the past year and over 150% higher from the low point it hit at its bottom last April.
Still, the cruise line trades for half of what it did before the pandemic was declared. If Carnival can navigate the shoals of the COVID variants, investors still might want to put a berth in their portfolio for its stock.
Who knew renting rooms from strangers would be so popular during a pandemic?
Rich Smith (Airbnb): A funny thing happened on the way to the pandemic. As Americans first quarantined, then socially distanced, then slowly ventured back outside -- but donned masks before approaching any strangers -- one of the businesses that actually bounced back pretty quickly was the one that asks you to rent rooms in strangers' houses and apartments.
That's right. Believe it or not, after suffering an 18.5% decline in revenue in Q3 2020 and a 22.5% decline in Q4, Airbnb enjoyed a modest 5% growth in sales in the first quarter of 2021, followed by nearly 300% growth in the recently ended Q2 2021.
Does that surprise you? It certainly surprised me to read in The Wall Street Journal last week that, counter-intuitively, Airbnb stock has actually been performing quite well through the pandemic. In Q1 2021, notes WSJ, "bookings were already growing [past] pre-pandemic levels." And this was all the more surprising given that rival renter-facilitator Expedia Group is still reporting bookings 26% below where they were just before the pandemic hit.
And Airbnb isn't done growing yet. Despite the arrival of the Delta variant of COVID-19, Airbnb says it now expects to report its "strongest quarterly revenue on record, finishing well above Q3 2019 levels," in Q3 2021.
Granted, at $83.4 billion in market capitalization, Airbnb stock sells for a rich 57.5 times trailing free cash flow valuation. But analysts forecast the company's revenue will nearly double over the next three years, even as its stock price has fallen 34% from its highs of six months ago. While Airbnb shares still look kind of expensive, I have to admit -- I'm at least tempted to buy already.
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