Summer’s here! Time to buy Hostelworld Group plc, Carnival plc and International Consolidated Airlns Grp SA?

Will these travel shares be hot beyond the summer: Hostelworld Group plc (LON: HSW), Carnival plc (LON: CCL) and International Consolidated Airlns Grp SA (LON: IAG)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Now that summer has officially begun and yearly holiday trips kick off, it’s worth taking a minute to examine a handful of the companies travellers may be interacting with over the next few months. Even though Hostelworld (LSE: HSW) may not be the first stop for any holidaymaker with enough cash to think about investing, its dominant position among budget-oriented travellers makes it an intriguing business.

Hostelworld makes its money by charging commission on each booking made on the company’s website and app. This asset-light model is why the company paid out 75% of adjusted post-tax profits in dividends last year and posted solid, if unspectacular, EBITDA margins of 28%. So with high cash flow and a whopping 7.4% yielding dividend pencilled-in for next year by analysts, why are the shares trading at a bargain 10 times forward earnings?

The primary culprit is a May update that warned Q2 trading was below expectations due to terrorism-related fears in Europe. What worries me more than short-term declines in overall tourist numbers in Europe is the fact the company expects to spend around 45% of net revenue on marketing this year. This makes me believe that Hostelworld’s key demographic of budget-conscious millennials has been largely tapped, or that trendier options such as Airbnb have stolen the company’s thunder. Either way, prospective investors should always be extra cautious when management revises expectations.

Cyclical businesses

If staying in a hostel with shared bathrooms and 16 beds to a room isn’t your speed, how about a cruise? Carnival (LSE: CCL) is banking on longer lifespans and increased spending power among retirees to boost the bottom line for years to come and has been investing billions in new, state-of-the-art ships meant to last years.

Although Carnival, the world’s largest cruise ship operator, has enjoyed a fabulous run since the end of the Financial Crisis, I remain wary about buying-in just yet. The high up-front costs for building massive vessels, relatively low margins and reliance on economic tailwinds make cruise ship companies highly cyclical businesses. Furthermore, for a mature business Carnival’s dividend isn’t amazing with only a 2.4% yield on offer. Despite being a well-run business, the cyclical nature of the industry, low margins and the low dividend don’t put Carnival at the top of my summer investing list.

The vast majority of travel-dependent companies are highly cyclical, but few have been as susceptible to boom and bust cycles as airlines. International Consolidated Airlines Group (LSE: IAG), the parent of British Airways, Iberia and Aer Lingus, is trying to moderate pain from the inevitable bust by constraining what has traditionally been runaway capacity growth during the boom years.

While IAG and other airlines say they’ve finally learned their lesson, I’m not so sure. At IAG alone in Q1 total available seat kilometres, a key industry metric for capacity, rose 11.9% year-on-year. And, although high demand meant fewer empty seats, the International Air Transport Association is forecasting slower demand growth in the coming quarters. Combined with the record number of planes manufacturers are booking orders for, I expect airline shares to once again be in for a bumpy landing when economic growth cools. So, despite analysts predicting a low 6 times forward P/E and 4.5% yield for IAG shares next year, I’ll be steering clear.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Warren Buffett owns this FTSE 100 stock. But should I?

Warren Buffett rarely invests in FTSE 100 shares but he does have a position in Diageo. Is it time for…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

After returning 101% in 2024 is this FTSE bank the best share to buy for 2025?

FTSE 100 bank NatWest Group turned out to be the best share to buy at the start of this year.…

Read more »

Investing Articles

Could Helium One be a millionaire-maker penny stock?

Shares of Helium One Global (LON:HE1) have soared 272% so far this year. Should I buy this penny stock while…

Read more »

Investing Articles

Are these 2 unsung FTSE blue-chips the passive income stocks I never knew I wanted?

Harvey Jones says that the FTSE 100 contains fantastic passive income stocks with deceptively modest yields. Here are two he's…

Read more »

A mixed ethnicity couple shopping for food in a supermarket
Investing Articles

Shhhh… These FTSE 250 stocks have quietly more than doubled in 2024

Forget those US tech titans. Our writer takes a closer look at two supposedly 'boring' FTSE 250 stocks that have…

Read more »

Investing Articles

As the Diageo share price flies on a double upgrade is this my last chance to buy it on the cheap?

The Diageo share price has inflicted plenty of pain on Harvey Jones in 2024, but suddenly it's serving up a…

Read more »

Investing Articles

7%+ yields! 3 choices to consider for a Stocks and Shares ISA

Christopher Ruane highlights a trio of FTSE companies each yielding over 7% he thinks investors should consider for a Stocks…

Read more »

Passive income text with pin graph chart on business table
Dividend Shares

How investors might try to turn £10,000 into a chunky passive income

Our writer Ken Hall looks at how the magic of compounding returns might help investors to create a handy second…

Read more »