City Insider - FT journalist David Stevenson on the travel industry


I have a sense that the worst may have passed in terms of sentiment towards the travel sector in the City, with institutional investors noticeably warming towards Tui Travel in particular.


Over the last few weeks I’ve been talking to mainstream equity fund managers about their portfolio strategies for 2011 (and beyond) and to a man (and occasional woman) they seem to be favouring investing in defensively priced market leaders in out-of-favour sectors.


Towards the end of last year if I had attempted to insert Tui Travel into that category I’d have been politely rebuffed – travel was perceived as being just too risky ahead of the slowdown in the first half of 2011.


What spooked investors in particular was the idea of investing in a sector that clearly had a lot to lose as consumer sentiment dived ahead of the big tax increases and job cuts. The perception was that travel was hugely vulnerable to a retail bloodbath and even Tui might find itself dragged into the maelstrom.


Well, that bloodbath has indeed started. And yet recent numbers from Tui’s pre-close trading update confirmed that the effect so far has not been anywhere near as bad as expected. In the really difficult markets like the UK, Tui is just about managing to hold the line. 


“We have very few holidays left to sell for the winter. As we approach the summer season… we are pleased with our trading particularly for differentiated products where demand is high and which tend to achieve higher margins.”


These comments from the trading statement by Peter Long seem to have had a stabilising effect on the investors I’ve been talking to.


I was also struck by Long’s observation on the group’s differentiated products, which “have continued to perform particularly well, with booking volumes up 18%, 52% and 23% in the UK, Nordics and Germany respectively.


“In Germany, consumer confidence has markedly improved and we are trading strongly. We have increased our capacity by a further 3% principally to Turkey, the Balearics, the Canaries and Greece to satisfy the demand that the overall market is experiencing.”


The key for Tui is to show that its UK division isn’t holding back those rampant Germans and Nordics. As one investor put it to me “we know the UK will be the poorer cousin, but what we don’t want is for the UK numbers to drag the overall performance backwards.


“These numbers confirmed that Tui is holding its own and that its premium products seem to be growing in strength. If you’re going to buy into travel you want the premium brand to be unsullied and resurgent even in those nasty, horrid markets.”


I’d add one more optimistic assessment of these numbers. Tui has only hedged 57% of its winter 2011/12 fuel, which is fairly normal for this time of the year. That low number might actually work in the company’s favour as I’d be willing to wager that oil prices might start to fall back later in the year as the markets begin to contemplate the risks to recovery in 2012 from rampant commodity inflation.


Stepping back from these numbers and looking at Tui Travel’s share price I’m struck by a simple observation – it is relatively cheap. At its current share price of around 223p, Tui is trading  just over 10 times expected earnings for the coming year with a yield just a smidgen under 5%.


That’s not an outrageous bargain especially when compared to other globally diversified blue chip outfits like the big pharmaceutical stocks (AstraZeneca and GSK), but it’s a low rating when you understand that Tui Travel is ideally positioned to benefit from sustained growth in the all important German and Nordic markets.


Add in the inevitable bid speculation and you can begin to understand why one investor told me that “Tui Travel is the only travel stock I’d even start thinking about buying at these price levels. It’s still a contrarian bet, but it’s a quality contrarian bet. Let’s just hope that oil prices don’t keep rising”.


And on that theme of higher oil prices hitting quality travel stocks, it’s worth mentioning another market leader in the travel sector that might just stage a miraculous recovery – Carnival.


Recent 2011 profit guidance spooked investors and the shares pulled back 15%, which seemed a rather brutal pullback, and the shares now trade at the same level they were in 2004. A recent article in Barron’s (the newspaper that is, in effect, the bible for US investor’s) highlighted that the market leading cruise operator was now perceived as being good value.


The recent sell off had “excited bulls, who argue that the stock looks inexpensive based on an expected snapback in profits next year, rising free cash flow and slowing capacity growth in the cruise-ship industry.”


“Enough is enough: seriously,” wrote Barclays analyst Felicia Hendrix in the headline to a recent note, arguing that investors should “take advantage of the mismatch between Carnival’s optimism and the market’s pessimism.” Carnival trades for under 12 times her 2012 estimate of $3.30 a share. Hendrix carries a price target of 50, about 15 times expected earnings.


Carnival would appear to be perfectly positioned for two key trends later in 2011 and 2012 – the first is that the pace of new ship deliveries will begin to slow down in the next few years, improving cash flow markedly.


More importantly Carnival seems to have sailed past the worst that the global economy, weather and geopolitics can throw at it and is now a classic consumer confidence rebound play.


As with Tui Travel, Carnival is now perceived as having the best collection of brands to excite consumers as they start spending again towards the end of 2011.


God alone knows maybe even the UK consumer will open their wallets towards the end of Autumn 2011 as slow growth begins to push those all important employment numbers steadily up.