Are we all going on a summer holiday? I ask this not to leave you with a mental image of Cliff Richard (sorry), but because some travel stocks seem to have a spectacular recovery priced into them.
While it’s true that the Covid years have created pent-up demand for foreign holidays, the share price of the Crowne Plaza owner InterContinental Hotels Group (IHG) is, at £51, now trading at about the same level as it did pre-pandemic.
That’s despite the cost-of- living crisis, the bleak geopolitical outlook, and the fact that Covid is still raging worldwide and other leaders are not as anti-lockdown as Boris Johnson.
IHG does have some fluffy extras: its fee-based franchise operating model meant it avoided burning through running costs during lockdown; free cashflow stayed positive; and it now has more than $2 billion (£1.5 billion) in cash and credit facilities to spend as our travel love affair is rekindled.
The investment bank Peel Hunt reckons that IHG’s underlying earnings could come close to $914 million — its analysts’ current 2023 target — as soon as this year. That would give a price to earnings ratio of 23 — decent, but not far off what it has been for the past two decades or so.
IHG is expensive. Stay in the stock if its shareholder hotel room discount will cut the cost of your summer holiday — otherwise, sell.
There are more interesting investment journeys elsewhere. Jet2 Holidays had a fairly good pandemic, if not financially: its shares crashed 72 per cent as the extent of Covid emerged, and the Leeds-based airline is set to post a loss of at least £378 million for last year. But it was repeatedly singled out for treating customers well — the consumer group MoneySavingExpert praised Jet2’s efficient pandemic refund policy — and customers haven’t forgotten.
Jet2’s load factor — how many bottoms are squashed into its seats — for this summer is only 2.5 per cent behind the same period in 2019, and that’s on 14 per cent more seat capacity.
The airline stands apart from its budget rivals with north of £1 billion cash on its balance sheet and, unlike IHG, Jet2 shares are still well below their £19 pre-Covid peak — now at £12.71. Jet2’s shares are changing hands at about 12 times the earnings expected for the next year financial year. Yet it’s set to profit as the escalating cost of living sees a trading down: after two years off, few are keen to cancel them entirely if they can avoid it. But a budget airline with a deserved reputation for treating customers better than some of its bigger-brand rivals is well positioned to soar. Buy Jet2.
