In association with Travelport
Investors are fairly shallow creatures. They like a company to have a share price that, at the very least, stays steady if not actually increases in value steadily over time.
They like regular dividend cheques, as long as the company can afford it. They like CEOs who know what they are doing, with a plan of action that involves generating more cash to pay that dividend.
Most of all they like an investment where they think there is a good ‘story’ at work, which involves the company as a catalyst for change (a positive one).
Last, but by no means least, it also helps if they are in good company with solid institutional support in the shareholder base helped by a surfeit of analysts covering the sector, publishing largely pointless reports that at the very least confirm market prejudices.
Deliver on these priorities and a share price will stay strong; fail and you will be in the dog house for years.
How does the travel sector stack up? If you believe many travel industry executives you would think the sector has no friends.
The number of proper analysts covering travel seems to be in terminal decline, which feeds into a worry that the sector is blighted by neglect, with low institutional support and a terminal lack of interest.
There is even a perception that institutional investors have written off the travel agent as a victim of a double blow: the first administered by new technologies (which commoditise and personalise transactions), the second by a slump in consumer confidence.
The reality is different. Over 12 months, Tui Travel, easyJet and Ryanair have delivered returns of more than 40%.
To be fair, those impressive numbers are from a pretty low base in 2011, but after these sharp increases I would argue the City rates the travel sector champions relatively highly given their evident volatility in underlying trading.
In fact, all the key players in leisure travel trade at a smidgeon below ten-times earnings, if not a great deal more in some cases (Ryanair and Carnival). These numbers hardly indicate the City believes travel is in terminal decline.
The biggest transformation has been at Tui Travel where the share price rebounded dramatically over the summer, hitting highs of around 230p.
Almost without exception, investors and analysts have been impressed by the resilience of the number-one travel operator in the face of a consumer recession.
Most companies sit in a divide between growth stocks (where the catalysts for expansion in profits are widely understood) and value or ‘defensive’ stocks where investors like the quality aspects of the brand and the dividends.
Where do the travel giants sit in this divide?
Tui Travel and easyJet are, perhaps, most interesting. The way investors view both companies has changed markedly over the last year, with easyJet transforming itself into a growth stock where new management has successfully reshaped the customer proposition and increased top line growth.
Obviously, growth comes with a downside – it involves spending more on aircraft, which will annoy Sir Stelios, but easyJet is the one to watch in 2013.
By contrast, Tui Travel has turned into a rather predictable, almost defensive stock.
Investors are alive to the fact that consumer spending in the UK remains weak, but there is a widespread perception that Tui Travel is a bit like Marks & Spencer or John Lewis in that it has a strong, quality brand which allows it to flex its margins.
It helps that Tui Travel also has a solid management team that is widely liked, and a supportive investor base which appreciates a near-5% dividend (well-funded by profits).
Many dividend-orientated fund managers have begun buying the shares in recent months. Can Tui convince the wider investing public that it’s a quality company with world-class businesses that boast a bright future?
If it does, the shares could carry on upwards.
That leaves Ryanair, which is as close as one can imagine to a company that is turning boring. It is the sector’s equivalent to Tesco, in the nicest sense.
It seems relatively immune to any downturn in the economy and, although it isn’t loved, it’s feared. Crucially, Ryanair manages its balance sheet carefully, with particular attention to returning cash to shareholders.
The threat is that Ryanair follows Tesco into the ‘spurned’ category as investors begin to worry that it is actually in decline simply because it has grown too big (not something that is imminent).
The big question for Ryanair is what’s next? What is the next catalyst for change or is it happy to go ‘ex’ growth?
All predictions could, of course, be derailed by a sudden global recession following a European meltdown.
What happens next is anyone’s guess, although investors have learned not to bet against central bankers doing everything in their power (which may be limited) to kick-start the global economy.