As May approaches, I’ve been looking at two FTSE 100 stocks. Both are in the travel sector. One of them has a business model that has allowed it to weather the storm during the pandemic and I think there might be an attractive opportunity for me in May. The other has been substantially damaged and I’m staying well away from it.
Travel stocks
Travel stocks have had a difficult few years. Pandemic-induced restrictions have caused demand for their products and services to tumble. As a result, share prices have generally been falling in this sector.
Sometimes, a falling share price can present an attractive buying opportunity. Other times, it’s an indication that the underlying business is in trouble. I think that the FTSE 100 has one of each.
A FTSE 100 stock I’m avoiding
A reduction in global travel has been disastrous for airlines. In particular, a FTSE 100 stock that I’m staying well away from in May is easyJet (LSE:EZJ).
During the pandemic, the company understandably struggled as travel restrictions dampened demand. But during this time, EasyJet wasn’t able to bring down its costs of staff, aircraft, and fuel. As a result, the company emerged from the pandemic in significantly worse shape than when it entered.
Furthermore, hopes of profiting from a surge in pent-up travel demand appear to be complicated. While demand for travel has returned, easyJet has struggled to find the staff to cope with the increased desire for travel and has ended up having to cancel flights.
A combination of increased debt (up over 400% compared to 2008) and operational problems means that I’m staying well away from easyJet shares in May.
A FTSE 100 stock I’m buying
Like easyJet, InterContinental Hotels Group (LSE:IHG) also suffered from reduced demand during the pandemic. Importantly, though, IHG managed to limit its expenses during that time, restricting the damage to the underlying business.
Where easyJet owns its aircraft and therefore incurred expenses in maintaining them, InterContinental Hotels typically doesn’t own its buildings. As a result, it was able to leave the costs of maintaining them during the pandemic to the operators that are part of its franchise model.
I also think that InterContinental has a better competitive position than easyJet does. Where it’s easy for easyJet customers to use a different airline next time they fly, it’s difficult and expensive for IHG’s franchisees to change to a different brand.
InterContinental has not emerged from the pandemic entirely unscathed. Debt is currently around 50% higher than it was in 2018 and revenues have yet to fully recover. The company’s resilient business model also means that its share price never really fell the way that the easyJet share price did.
Overall, though, I think that InterContinental Hotels is in a much strong position than easyJet is as a result of its business model. I’ll be looking at buying shares for my portfolio in May.
