3 Best Summer Travel Stocks With Steven Cress (undefined:UAL)

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Head of Quantitative Strategies Steven Cress shares his data-driven top 3 summer travel stocks. Why Royal Caribbean Cruise is his first pick (2:40). This airline stock is a buy the dip opportunity (11:50). MGM earns the 3rd pick and shows the importance of digging into underlying metrics (23:50).

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Transcript

Daniel Snyder: Hello everyone. Daniel Snyder from Seeking Alpha here. Thank you so much for taking the time to hang out with us today. We have the top travel stocks from the man, the myth, the legend, Head of Quantitative Strategies here at Seeking Alpha, Steven Cress. Steven, how are you doing this morning?

Steven Cress: Daniel, very well. And thank you for that warm introduction. I’m really happy to be here picking the three stocks that are just really timely.

DS: Yes. I mean, this is the whole idea of the theme, right? Is we’re in summer now and obviously when summer hits, people like to travel. So going along with the theme and the seasonality, I reached out to you and said, hey, what if we did a little travel stock picks? And you said, absolutely, I’ve got some ready to go.

SC: And I’ve got to just say, both Daniel and I were traveling this week. We had to go to New York City for a Seeking Alpha Summit that was standing room only. It was so well attended. The reason I highlighted though is not the conference itself. It was the actual travel. I don’t think I’ve seen New York this packed since the pandemic and the traffic coming in and out was just like at a standstill.

Daniel, what did you experience in the airport?

DS: Yeah, Steve, I was going to tell you Atlanta airport was packed beyond belief. I mean, it is definitely not COVID anymore. Right. I traveled the last few years and it is full back, full swing, flights everywhere, flights being delayed, packed flights. It’s like everybody’s out and about.

SC: Lots of delays. A lot of people that are coming in hit delays. I guess not enough planes, which you may perceive as, you know, not a good thing, but it allows them to jack the prices up and certainly just a ton of people traveling. I don’t think I could have planned this article anymore timely. And the advent of all the traveling is just starting up as we’re getting to the early days of summer.

So a couple of highlights on an article that I published today, you will be able to find that article on Seeking Alpha Premium.

Airlines are expected to carry a record 271 million passengers this summer and cruise lines 34.7 million by year-end. Certainly a much different story than a couple of years ago for the cruise lines. Hotel-casinos in Las Vegas, the top U.S. summer spot reported record gaming winnings and uptick in visitors and room rates.

We have three stocks that we’re recommending here, all with very solid fundamentals. Obviously the booming travel and tourism sector and record profitable growth for many of these companies presenting a terrific opportunity for investors.

So our first pick Royal Caribbean Cruises (NYSE:RCL). I know a lot of people are mixed in cruises, but certainly the numbers are showing it’s not mixed at all. People are going on cruises. I am going to take us to the Seeking Apple platform, but just here’s a quick recap of what it looks like from a Quant perspective.

And for those who are not familiar with what we do on a Quant basis, it is a data driven strategy. We’re not taking any emotional bias. We’re not typically interviewing any management teams. We’re looking at the data. And when we look at the data, we look at hundreds of metrics for a company and we compare it to the rest of the sector and we score it.

And in the case here, if you were to look at the Factor Grades on the left side, you could see those give you an instant characterization of where the company stands on value, growth, profitability, momentum and revisions versus the sector. Being the consumer discretionary sector for Royal Caribbean Cruises.

So you can see the valuation is in line with the C minus grade, but straight As across the board for all the other core metrics. Looking at growth and profitability, it looks great. And as a result if you look at the right hand side for the Quant Ranking, you can see in the sector, they rank number 14 out of 510 stocks. And then within its industry, it ranks number three out of 37.

So I’m going to take us to the stock page for Royal Caribbean and you can see this stock has had incredible momentum for the last 52 weeks. It’s up about 55%. And the year-to-date the stock is up 15%. So don’t let that scare you away. It has beat the S&P. It has beat the sector. But the most important thing here is not the performance that’s been achieved. It’s looking at the valuation framework. It’s looking at the growth. It’s looking at the profitability right now versus the sector.

So people should not be fearful of price appreciation that’s occurred in the stock because every day we refresh our data points. We refresh value, growth, profitability and it gets updated. So you’re able to look at this stock versus the sector on a daily basis. And you can see how the factor grades look.

So I’m going to take you one step further. We’re actually going to go to the growth factor and we’re going to click on it. And this will show you some of the underlying metrics for Royal Caribbean. As you can see, it has some really strong top line numbers. Revenue growth is 38% versus the sector at 2%. So you can see it’s at a 1,682% premium, hence the A grade. So this becomes very intuitive.

You can see that that grade which provides an instant characterization of how that metric compares to the sector. But we also provide the absolute data right next to it. So you can see what the data point is, what it is for the sector. And you can actually even see what it is versus its five-year history as well.

So you’ll be able to see for Royal Caribbean, by example, the forward revenue growth rate, the five-year average is 39%. So it’s a little bit of a drag compared to that five-year average. But I imagine as it keeps moving forward, that revenue growth is going to continue to move up because the company is doing fantastic.

If we look at it on a profitability perspective, boy, I just think what a dire strait these companies were in like two years ago. It’s completely turned around. They’re earning so much cash now that the profitability has completely swung around.

So whether you’re looking at the gross profit margins or EBITDA margins or return on equity. The return on equity for this stock is 52% versus 11% for the sector. That is an amazing return on equity. Same for return on capital and return on total assets. The EBITDA margin is at 32% and the EBIT margin at 22%. So really looking great there.

So if we want to see how this stock has done in terms of its price performance versus the sector, we would just click on Momentum. And you could see for us, Momentum is actually a really important factor. It’s highly predictable of future price action. And we look at four different periods. We look at the one-year period, nine months, six months and three months. And you could see compared to the sector, it has outperformed it across the board. So again, a really great sign.

I should say for those who are not familiar with Royal Caribbean, it is a company that does have a very strong brand. There is a lot of advertising for it. They are one of the largest in the cruise business. They have about 65 ships as of February this year. They have a number of different lines. So it gives you a good menu of really high priced services for the cruise industry versus moderate prices. Royal Caribbean up there is sort of the top. Company was founded in 1968 out of Miami. So they’ve been around for a long time.

I did mention the revenue growth rate and this EBITDA growth rate very, very strong. Royal Caribbean in 2024, they provided guidance targeting about 8.1% capacity, which is a really good number. They’re adding two new super huge ships expected to be delivered soon as well. And they are achieving record level booking and record price increases as well with a net yield growth of about 9% to 10%.

According to Royal Caribbean, they expect to hit what they call the trifecta metrics, which is a triple digit adjusted EBITDA, APCD and return on invested capital in the teens, and double digit EPS growth. So looking really strong there.

And this is a snapshot from the company in regards to their guidance going forward. So capacity growth expected to be about 8.1%, very strong yield growth close to the 10% net yield level, very strong cost controls, which they did want to highlight in their presentation. Obviously accelerating demand. So all around looking really, really strong for Royal Caribbean.

Some of their core strengths that I’ll mention too is in their fleet. It’s not only a large fleet, but most of their fleet has state-of-the-art technology as well. It is a tremendous company. It’s across the globe in terms of their services. So they have a comprehensive list of destinations, but within that list of destinations, they have really cool itineraries for all the destinations. And they generate a lot of money from those excursions as well.

Obviously very strong brand recognition. And also especially with Royal Caribbean and that particular brand, they’re known to having, super, super cool onboarding experiences. And that’s due to the size of the ships that they can offer a wide range of activities.

DS: I want to see if we could jump in and actually go back to the platform real quick, because I think when people think about cruise lines, they think about Carnival (CCL) and Norwegian (NCLH) as well.

So if you wouldn’t mind going to the, the Quant of the, the industry picks actually where you said it was number three, I believe, out of 37, just want to highlight Carnival is on this list. If you look at number five and number seven, and the difference here is, the factor grades, right? The valuation being a D plus for Carnival compared to a C minus for Royal Caribbean. And then you start looking at even the momentum, right? The Royal Caribbean factor grade of momentum is an A, while Carnival is a B. I think that says a B minus, correct?

SC: Yes.

DS: So they’re on that list though.

SC: So yes, I mean, they – boy, it is like they’re, they are really close, but you’re looking at Royal Caribbean, it’s almost like just a razor blade of a difference of like the valuation. One is C minus, one is versus D plus, growth of A versus growth of A plus actually for Carnival. And then when you’re looking at profitability, they both have A grades, momentum. One is an A and the other is a B minus. So that’s a pretty big divergence. So it’s just showing you that investors have a little bit more confidence in Royal Caribbean as you can see by that momentum grade.

But the EPS revisions and I’ll click on that an A plus for Royal Caribbean versus an A, not much of a difference but still really strong. But I do want to take us into that. I’m glad you brought us back to this. So I’m going to click on that. And for the Earnings Summary, you could see how positive analysts are.

So this is a bit of a unique grade that we have at Seeking Alpha. We call it our EPS revision grade. And what we focus on here is actually the quantity of analysts that take their numbers up or down. So we’re looking just at the sheer number.

And what this is telling us is in the last 90 days, 20 analysts have actually revised our earnings estimates up from what they were. None have taken them down. So that’s for the full year. If we look on the upper right-hand side, we could see what they’re doing for the quarter.

And for the upcoming quarter, we could see that 15 analysts have revised their quarterly estimate up, none have taken it down. So this is why it’s the number one pick right now for our travel stocks.

DS: That’s brilliant. Thank you for diving into that, Steve.

SC: Absolutely. So we’re going to head on to our next pick, which is United Airlines (NASDAQ:UAL), which did have really stellar performance, but as of late, the stock has pulled back. And I think this could be actually a very good opportunity to buy on the dip.

So I’m going to take us through an overview here from a helicopter view. We could see that the factor grades look absolutely fantastic. So again, those factor grades are sector relative.

This is in the industrials sector. The company in the industrials sector ranks number 39 out of 627. What you have to keep in mind here is there’s a lot of different companies within the industrials sector. It has a really unique makeup. It could be anywhere from home builders to machinery companies to airlines. And we don’t set the sector classifications that get set by S&P Global and companies like MSCI. But within the confines of those sectors, we apply our grades and we — it looks that United Airlines appears to be a very strong company.

If you look at the industry, which is a closer fit for this type of company because the industry is passenger airlines, you can see it ranks number three out of 26. So a couple of the other highlights here, founded in 1968, feels like it’s a much older company. I mean, UAL feels like it’s been around just forever, but they’ve been around since 1968. They are headquartered in Chicago and through their subsidiaries, we always think of it as a passenger airline company, but they’re very big in the cargo space as well. They provide ground catering across the world, and they also provide maintenance services for third parties. So that would be for different airlines, whether it be passenger or cargo.

So, a couple other points here, the revenue growth for this company, not nearly as strong as Royal Caribbean, but for the airlines, it’s pretty good. It has 12% year-over-year revenue growth rate, and the forward earnings growth rate is 10.5%.

So one thing about Seeking Alpha Quant is we do not just look at history. We actually take historical numbers, but we take future estimated growth rates as well. And within that, what we’re doing is we’re looking at the professional analyst community, and we’re looking at revenue growth rates, we’re looking at earnings growth rates, EPS, EBITDA, number of different growth rates that we take the consensus from analysts. So we actually combine the historical growth rates with the forward growth rates to give you a picture of past and future.

So for UAL, particularly the EBITDA growth was quite strong, 27% year-over-year, and the forward EBITDA growth rate was 21%. They have a really nice mix. They’ve got a low valuation compared to the sector. They have strong growth rates and really superior profitability versus the sector as well.

Now, what’s interesting here is in the last couple, I’d say, months, maybe a little bit longer, the stock has taken a bit of a hit, and there’ve been a couple of headlines that have impacted that. You’ve had airfares falling for the month of May versus year-over-year. So I think that spooked the sector a little bit. Regardless of that fall in May though, it’s still anticipated that the global airline revenue is expected to hit $1 trillion in 2024.

So I’m looking at this situation as maybe a buy and a dip. So you had that come out in May, airfares fell, UAL also announced that they expect to have some staffing cuts as they’re facing a shortage of airplanes.

And they also gave Q2 guidance to be slightly below analyst expectations. So this is what’s interesting. The companies do this all the time. They try to manage expectations. Stocks have pullbacks. But for the stocks that have really solid fundamentals, whenever management does that, I actually always view that as a buying opportunity, because they have solid fundamentals. It’s a much longer cycle.

The C level executives are trying to manage from a quarter to quarter basis for Wall Street when they make these presentations. So a lot of the larger companies are giving guidance on a quarterly basis, and it doesn’t give you sort of that picture of really what to expect in the long term. And when you look at the longer term picture for this company, they’re in a very good cycle. So I thought this was interesting.

If you look at what I’m saying here, buy the dip, you’ll see in sort of like the November time period, a number of the analysts took their estimates down, but now they’re starting to bump them up again. So I think that’s really interesting. And then when I take a look at that EPS revision grade that we have, in the last 90 days, you have 15 analysts that have actually taken their estimates up and only two that have taken it down.

So, despite those headlines and despite that guidance, one thing that analysts do tend to do well is their models are really important. Their directional recommendations may be off a little bit because it may be tainted by investment banking or block trades, but analysts do like to get their numbers right. And I find it fascinating, despite those headlines that we’ve seen, that 15 analysts have taken their earnings estimates up, and only two have taken it down.

So I’m going to take us back to the platform here. And we’re going to go to the stock page for United Airlines. As you can see, the stock is a Buy as rated by the Seeking Alpha contributors. It’s a Buy as rated by Wall Street. But from a Quant perspective, we have a Strong Buy.

And why do we have a Strong Buy? Because when we’re taking that data-driven perspective and we look at the value for the company, the growth, the profitability, you can see it’s straight As for those three metrics. And then when it comes to the momentum and revisions, we’re in a solid B. So the stock over the last year has been a little bit on the weaker side and year to date, it’s actually outperforming the benchmark.

And Daniel,I actually saw a question fly by. The question was, how long do you hold the stock for? So you can see the Quant rating right now is a Strong Buy on the stock. And it’s a Strong Buy because we believe that the stock is mispriced.

Anytime you see a Strong Buy in the stock, the Quant system is telling you the stock is mispriced versus its sector. And you know that by looking at the Factor Grades. So when you’re looking at valuation, growth, and profitability, especially when you see it in the green like this, it means that the valuation framework, it’s a cheap stock, the growth is stronger than the sector, the profitability is stronger than the sector. So as the Quant system is looking at that and rating it, it’s telling you it’s a Strong Buy.

If the quant grade were to drop to a Buy or a Hold, to answer this person’s question, a Hold means Hold. It doesn’t mean Sell. And in fact, we have a product called Alpha Picks. And when we are in a position where a stock goes to Sell and we liquidate it, we buy the other stocks in the portfolio, whether they’re rated Strong Buy, Buy or Hold, we buy them all to give us that diversification. So a Hold means Hold. You sell the stock when the rating changes to a Sell or a Strong Sell, but Hold means Hold. So I’m really glad that I saw that question.

This could actually be a good opportunity to buy in a dip. Year to date, it’s up about 16.5%. But if you look on the month, the stock is down almost 11%. And we have a couple of those headlines, Daniel pointed to them. To me, these headlines could have an impact on the upcoming quarter, but the fundamentals are still incredibly strong when we’re looking at this company relative to the rest of the sector.

So I usually take advantage of these opportunities, especially when management is just kind of giving guidance for a quarter and not necessarily for a full year. And that’s clearly where the stock sort of took its focus.

Because when we do look at the earnings card, we can see that they had a wonderful beat on both bottom line and top line in the last quarter. And going forward, in the last 90 days, you’ve had 15 analysts, they’ve taken their earnings estimates up and only two have taken it down.

So you had a period, I think, when some of that news was coming out, a couple of them revised down a little bit, but that looks like that’s changed. And in the last 90 days, rapidly, you have 15 people taking estimates up. For the quarter it’s still a little bit on the tighter side.

If you look at the upcoming quarter you had seven analysts take up, five taking it down, and it’s for reasons like right there where you’re focusing just on the quarter. That’s why you’ve probably seen the stock come off 10% in the last month. But longer term, analysts are still very positive on this. Do you have any other questions on United Airlines?

DS: No, I don’t think so. I mean, if you wanted to, maybe you jump over to the peers tab right there and you can kind of show a quick comparison between some of the players and also everybody watching right now, if you are a Seeking Alpha Premium member, you can dive into this peers tab, you can edit which symbols you want to show, you can do up to 20 different tickers on this page and get all of these metrics side by side to compare these companies quickly.

SC: Yeah, and you know what, I think that’s a really good point. I want to show you. So what we did is we just clicked on the peers tab. So I was on the summary before, which is the main stock page. Daniel said, let’s see how this company looks versus its peers.

So we just click on peers, but I noticed here that, they’re providing a nice diversification of some of the smaller companies, some of the international, but I want to say, I want to look at it versus Delta (DAL). So I want to edit the symbol. So I’m going to click on compare, and now we could see the return. So you could see, what the return is on a year basis. You could see on a year-to-date basis. So, Delta is actually really has had a very, very nice return. And then if we look at it for the last month where there’s been some weakness, we could see that Delta is actually been outperforming United right there. So both of these stocks are actually a Strong Buy.

But when we look at the industry rank, you might be saying, okay, well, Delta’s had stronger price performance, why are you recommending United Airlines? Well, in the industry rank as of right now, remember, we refresh this data every day. So we want to look at the stock, is it mispriced today? Is it overvalued today?

So today, it’s telling us that it’s edging out Delta by a little bit and ranks number three out of 26. And it’s not hard to tell why. You just scroll down a little bit, and you could actually see that the valuation for United Airlines is stronger versus Delta. And you could see the growth is substantially stronger actually. That’s an A grade versus B minus.

Now why is that price performance for Delta a little bit better? Well, if you were looking at the stock, a couple months ago, Delta may have had a better valuation, and maybe the growth was closer in line with each other. But right now, that ranking has changed.

So we see UAL at number three and Delta at number four. So at this point, it looks like it’s a better value. It’s a better growth rate, and the EPS revisions still look to be more in favor of United Airlines as well. So that means, just slightly have more analysts taking their estimates up for United Airlines than you do for Delta.

And as you scroll down, you could see some other great metrics as well. So if you want to take a look at that valuation framework for UAL versus Delta or the sector, you could see what it is on those conventional metrics such as PE and PEG and price to sales, and price to book. You could see what the growth rate looks like for the company historically or going forward for the company versus Delta in the sector, and same for profitability. I absolutely love this page, especially, if I get down to, like, alright. I want to pick one stock, and there are two that seem to be neck and neck, which one do I go for? I take a look at this peers tab. So it’s just a great way to compare stocks.

DS: I just want to remind people as well, once you create that comparison, you can actually save it, so you can reference it in the future at any time it’s on your account.

SC: Absolutely. So this takes us to our final pick, MGM Resorts (MGM). Boy, I remember a couple years ago, this was a horrific looking situation, when we were in the pandemic. I mean, people stopped going to the casinos. They weren’t gambling in the casinos. The hotels were empty. They were keeping all their employees, a lot of these casino companies, which I just thought was really, a class act by many of them to keep their employees on so long despite not having any customers in the hotels or on the floors.

Well, that is a way different situation today. So currently MGM Resorts, Ticker Symbol MGM trading at $41. This is the picture that we’re seeing right now. So the valuation for this company, as you can see on the left hand side and the growth rate, when you take a look at the overall factors, it looks like they’re kind of just in line with the sector. And I’m going to show you the importance of sort of digging into the underlying metrics, which is always just one click away.

Company looks good, if we’re looking at profitability, momentum, and revisions. So in the consumer discretionary sector, which is a huge sector, the company ranks number 67 out of 510 stocks. But within its industry of casinos and gaming, it’s ranking five out of 30.

So what are we going to hit the highlights here? This is actually, the year-over-year growth rate is a little bit stronger than we saw in the airlines coming in at 18%. But the forward growth rate, for top line is about 10%. EBITDA growth is 31% year-over-year, which is strong. And the forward is 13%. So coming down a little bit. But you do have solid valuation metrics here. You have solid top line growth rates compared to the sector and very solid profitability.

I think something that’s interesting is the casinos in Asia, the Macau casinos. Revenues are now jumping to the highest levels since the pandemic. So a lot of that, revenue that was missing is starting to come back. I want to take us to the stock page here.

To me, it’s pretty important. Like, the when you look at the right hand rail here and you see the Factor Grades, that kind of gives you an instant characterization. But I always like to go one step further. I want to see what’s behind it because when you look at the underlying metrics, it could tell a little bit of a different story. So when I look at the overall metrics for valuation, it looks like it’s in line versus the sector. When I click on it, though, I’m pleasantly surprised to see that conventional metric, PE, is actually looking pretty good. It’s, like, an B minus, so higher than that C plus grade.

You could see it’s not expensive versus the sector. And in fact, the multiples on, either trailing or forward growth rate — forward rate basis for PE, whether it’s GAAP or non-GAAP, it’s above the sector, meaning I’m sorry, it’s at a discount to the sector. And you could see to the right here, it shows you what that discount is. So I think the valuation for those traditional metrics looks really good.

Where it’s not looking that great is, EV to sales, EV to EBITDA. Some of those are in the red, and it tends to be a little bit more expensive there. But the forward price to sales is a good metric. It’s at a 12% discount on forward price to sales. And price to cash flow, which is really important for these stocks, you could see it’s at a substantial discount to the sector. In fact, the trailing price to cash flow is a 41% discount, and the forward price to cash flow multiple is a 35% discount to the sector. So, again, fairly important to really take a look at some of those underlying metrics.

Same with growth. What we discover here is even though the overall growth grade and that overall growth grade we take by, sort of combining the scores of all these underlying metrics. I should mention that the underlying metrics, they are not equal weighted. Some have a higher predictive value than the other metrics. So, they’re not equally weighted, but it still gives you a really good comparison for how the company looks on the standalone metrics versus the sector.

And specifically, if we’re looking at top line for MGM, it looks strong. So the year-over-year growth rate for our revenues was 7% – almost 18% versus the sector at a mere 2%. And the forward revenue growth rate is 9.8% versus the sector at 3.6%. You could see even the EBITDA is fairly strong too. The year-over-year at 31%, and the forward EBITDA at 13%. So looking pretty good there.

The year-over-year EPS number is what takes us down and where the EPS diluted number is not meaningful because what we are finding with these, as they’re coming out of the pandemic, some of these casino stocks had negative earnings. So when we look at a CAGR growth rate, we have negative earnings mixed into that. It’s kind of not meaningful. So if you’re taking like a one or year years ago that was in the negative domain versus two years forward, which is the positive domain, it kind of washes out. So it doesn’t allow you to have like a clean CAGR and that’s why that number is coming up as non-meaningful.

But you can see, going forward, the top line is there and the EBITDA is there. So that EPS growth rate is going to be coming in there as well.

And then when we take a look at revisions, we could see that analysts are very positive whether the upcoming quarter where we’re seeing on the right side here, you’ve had 10 analysts take their estimates up, only one down. And for the full year, in the last 90 days, 10 analysts have taken their estimates up, only two down. And you could see in the recent quarter, which they just reported on May 1, they beat on both top line and bottom line. So really nice picture there.

Again, it’s all data driven. This is not my opinion or the opinion of Seeking Alpha. We’re clearly looking at a data driven process. We have five core factors that we look at being value, growth, profitability, momentum, and EPS revisions. And for each of those core factors per company, we’re looking at those factors versus the rest of the sector.

For some people, Daniel, that’s actually a lot of work. And, many times throughout the last couple of years, we were asked if we could put a product together where we just focused on our favorite Strong Buys for the Quant system and that’s what we did with our Alpha Picks system.

We’ve designed it and launched it about two years ago. And with Alpha Picks, we take our top two Quant stocks every month and we send it out to individuals that subscribe to the service and it’s actually done incredibly well. Right here, you’re going to see the current performance and you can see that, since inception, it’s up a 123% versus the S&P up 44% at the same time.

And, you’re actually getting a little bit of a picture here for some of our winners. And, you could see we picked Supermicro Computer (SMCI) back in November of 2022. The stock is up 961% since we recommended it. We put Modine Manufacturing (MOD) in there in December of 2022, that’s up 353%. We put in MI Homes (MHO) in 2022. So these are some of the earlier names.

We have close to 40 stocks in the portfolio. Of the 40 stocks, we have six of them over 100%, and I think we have a total of 16 or 17 stocks that are up over 50%. And again, this is really just taking our top two favorite ideas every month and sending out an e-mail or making it available on this platform, which is called Alpha Picks.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.