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.