What next for travel and leisure stocks? Broker thoughts and tips…

25th September 2014

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As travel and leisure companies start to update the market Ian Forrest, investment research analyst at The Share Centre, shares his views on the sector…

A steady recovery in consumer confidence in some regions has made the travel and leisure sector more attractive to investors.

A recent survey showed confidence in the UK is at its highest level for nine years, buoyed by steady improvement in the economy.

However, whilst market sentiment towards the sector has improved over the past year, it remains fragile.  Consumers may also become more cautious if interest rates begin to rise again towards the end of the year, as is widely expected.

Investors should focus on companies that could benefit from growing economies, such as the UK, and emerging middle classes, such as China, where the level of discretionary spending is rising.

Carnival delivered a strong third quarter update this week with the company beating expectations and raising its earnings guidance for the second time in three months. The company’s improved performance, growth in Asia, the impact of lower fuel costs and an end to a recent price war in the Caribbean are all positives for Carnival, however the rating remains relatively high so investors may want to wait for it to come down before getting on board.

Next week’s updates from Compass and no-frills airline EasyJet are expected to point to trading conditions ahead of full year results in November. Investors will be hoping for news from Compass that sluggish trading in Europe and Japan has improved. The market will be looking for further guidance on full-year profits from EasyJet, given that guidance in July was slightly below forecast.

For investors looking for exposure to the sector Forrest recommends Marston’s and William Hill.

We recommend Marston’s as a ‘buy’ for income seekers as the yield remains attractive. The company has been resilient and its F Plan strategy should continue to support further revenue growth. The business has a strong management track record and we have no reason to suspect it will deviate from its business strategy.

A strengthening UK economy is a positive for the company and we are fans of disposal proceeds being recycled into higher returning new pubs, giving some scope for improved margins over the longer term.

William Hill has been under recent regulatory pressure and subject to poor short-term sporting results, however we are optimistic that the attention it has paid to its corporate structure and strategy in various segments of its operation is starting to pay off. Valuation metrics suggest it is relatively undervalue, which we believe looks attractive on a stock that delivers strong return on capital employed and return on equity ratios ahead of peers.

We continue to recommend investors ‘buy’ William Hill. Growth in its mobile and online operations and selective international expansion should provide regional regulatory and economic diversification, while expanding its services to appeal to a wider demographic.

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