The Travel/ Reopening Play Is Still Thriving. One Fund Manager Shares His Favorite Travel Stocks

Travel stocks got hit hard at the beginning of the pandemic in March 2020, but they’ve been doing much better as investors started to embrace the reopening theme in anticipation of the end of the pandemic. While most things in the U.S. have opened back up after the widespread lockdowns, some question marks about the travel industry remain.

For example, many signs point to pent-up demand for leisure travel, but business travel is still up in the air. So how can investors know which travel stocks are better than others? Bryan Engler of wealth management firm Kovitz Investment Group shared some of his favorite travel stocks.

Experience over goods

In an interview, Engler believes that before the pandemic, people generally wanted experiences over goods, especially in the developed world. He explained that, as people became wealthier, their desire for experiences became a growing allocation of their budgets.

COVID put that on hold, but he is now seeing “incredible pent-up demand” for leisure travel. He added that many of the companies he likes offer higher returns on capital than the broader market and should trade at premium multiples.

“As we look out in the space, we see the almost near-certain comeback of travel for a bunch of businesses that are better than average and the potential still to earn very attractive returns from here,” Engler opines.

Engler described Expedia and Booking, in particular, as “amazing businesses.” He likes online travel agencies, although he isn’t super bullish on hotels in general. Engler is also bullish on Walt Disney and several stocks with indirect exposure to travel.

Las Vegas Sands

The one hotel-related stock Engler particularly likes is Las Vegas Sands, which he is “very bullish” on. He noted that at the end of the year, the casino resort operator will have sold off its namesake properties on the Las Vegas Strip and be left with its Macau and Singapore properties. 

Las Vegas Sands has already committed to a transaction to sell its Vegas Strip properties, which he expects to bring in about $6 billion in proceeds. The Marina Bay Sands is so iconic that its image is often what comes to mind when thinking about Singapore. 

Engler describes Las Vegas Sands’ Singapore property as “probably the most premier hotel in the world. Before COVID, it was doing roughly $1.7 billion in EBITDA, and it may be the “largest, most profitable piece of property on Earth.”

“They’ve taken this time during COVID to rapidly reinvest in space, including meeting rooms and the casino,” Engler says. “We think as time goes on, that property and the demand there will far exceed what we saw before COVID.”

He added that everyone right now is nervous about properties in Macau and pointed out a couple of issues going on there. Engler noted that China is cracking down on junket and VIP gambling, which are sometimes used to launder money and move it out of the country.

However, Las Vegas Sands has very little exposure to that type of VIP gambling in China and is more focused on the premium mass space. Engler expects China to eliminate its no-COVID policy and renew the company’s concession in largely the same format that we saw prior to COVID.

“If you put all that together, I can paint a case looking out in the future, 2025, 2026, when the world is normalized again, this business probably has earnings power far beyond prior peaks.”

Engler sees “huge potential in margin of safety” for Las Vegas Sands, as it will be near net-debt-neutral after the sale of the Las Vegas Strip properties, a rare feat for a casino operator. The company is a newer position for Kovitz, which bought it in the second half of 2021. 

According to Engler, when subtracting the values of the Singapore and Las Vegas Strip property, you get everything in Macau for free. He believes that when China lifts its restrictions, the Macau property will take off. 

“People in that area love to gamble,” Engler says. “They will flock back to Macau when that happens… Las Vegas Sands doesn’t just want to be a gambling destination. Years ago, it was just a gambling destination, but it benefited from adding all that entertainment capacity. That’s where Macau wants to go, more family-friendly and upscale.”

Expedia and Booking Holdings

Kovitz owns both Booking and Expedia, although Engler says the theses for them are slightly different. He described Booking as the “premier OTA in the world.” 

He believes Booking is “by far the best OTA that has ever existed,” partially because of its culture, which is extremely focused on marketing excellence. Engler likes the company’s management team and pretty much everything about it. Booking was trading near a record high at a market capitalization of about $103 billion but has since declined.

“When we look at what normalized activity can look like when we get past COVID, activity is going to be way above 2019 levels,” Engler states. “… It has all the hallmarks of what a compounder looks like.”

He believes that Expedia would be one of the best companies in the world if Booking didn’t exist. Engler noted that Expedia is more U.S.-centric but Booking has a lot of European exposure. He explained that Barry Diller came to Expedia before COVID and replaced the entire management team. Diller started eliminating “wasteful capital spending.”

“We’re now looking at a business with much better operations going forward and how it competes with Booking itself and how the economics will flow through on the income statement,” Engler explained. “It’s more of a self-help turnaround story, but it still has all those tailwinds of travel returning.”

Walt Disney

The one stock the firm has exposure to on the experience side of the equation is Walt Disney. He said it’s pretty clear that demand in the company’s parks is now higher than 2019 levels, although capacity is constrained by choice due to COVID. 

Engler likes everything Disney has done around its parks and added that the average spend of those who come to the park is up significantly. About 20% of park attendance is by foreigners, who haven’t even returned yet.

“We were in Disneyland in the summer, and it was packed,” he said. “It doesn’t matter if it’s masks or no masks. Attendance is full. Their biggest issue in a lot of industries, especially hospitality, they’re struggling to get labor to come completely back, but I think it’s temporary.”

Engler noted that Disney is more complicated because it’s not just travel. It’s a huge entertainment business. However, he noted that the company has been a “hundred-year asset” and is in its centennial year right now. 

“It is one of the businesses we are most confident in,” Engler states. “It has another hundred years in front of it. It’s a content powerhouse that has the unique ability to tie together all the parts of its business flywheel.”

He believes Disney enjoys a virtual cycle that no other player has the ability to offer. Engler believes Disney’s entertainment arm is probably the most prolific entertainment arm in the world, as the company dominates the box office. However, he also pointed out that the company’s linear products like ESPN have challenges as consumers cut the cord and move to streaming. 

Nonetheless, Disney+ is dominating the streaming market, with its subscriber count exploding dramatically higher and well above expectations. The streaming service hit its initial targets early. Engler sees Disney+ as the number two streaming service after Netflix.

Derivative travel stocks

Engler also discussed his theses for what he describes as “derivative travel stocks,” which include Visa, Mastercard and American Express. Some of these companies’ most profitable business comes from cross-border activity, which requires some level of international travel to come back.

He pointed out that Visa and Mastercard came under pressure when investors started to worry about some of the new payment models. Cross-border activity is both credit card companies’ most profitable business, so international travel must fully recovery to see that activity pick up. 

However, Engler does see signs of it returning. He described Visa has having “one of the strongest moats in the world.” Engler doesn’t think the buy-now-pay-later trend is a threat. He pointed out that many fintech business models coming to market are riding on the rails of Visa or Mastercard to scale their business, so they see them as a “friend.”

“Everyone likes to hate on credit card fees and how much the credit system pulls out of a transaction,” Engler says. “… but they’re not the part of the market taking the majority of these fees.”

Philip Morris

He sees Philip Morris as another derivative travel stock because of the benefits it enjoys through the sales of its products in duty-free stores frequented by travelers. The cigarette maker is Kovitz’s number two position, and the firm has owned for a few years. 

Engler feels it’s a mistake not to own Philip Morris. Although it is a tobacco stock, he expects more than half of the company’s revenue to come from its reduced-risk portfolio by 2025. The company offers products with a 95% to 98% reduction in cancer risk, and its reduced-risk portfolio is currently the clear leader in the space globally.

Michelle Jones contributed to this article.