The rise of the Omicron variant of coronavirus has caused havoc for the international travel industry and travel stocks. Travel bans have upended plans, and new strict testing regimes have smashed consumer confidence.
Since the new variant was discovered, shares in some of the UK’s premier travel companies have fallen by a double-digit percentage. IAG has fallen 20% over the past month, easyJet‘s shares have fallen 15%, and Jet2 has slumped 21%.
However, I think some companies in the industry are better positioned to whether the uncertainty than others. As such, following recent declines, I have been looking for undervalued opportunities in the travel sector.
Travel stocks to buy
Further restrictions will have a clear impact on the travel industry as a whole, but some businesses will feel the pain more than others. IAG, TUI and easyJet could all suffer more than their peers, due to their leveraged balance sheets and lack of competitive advantages.
By comparison, companies like Wizz (LSE: WIZZ) and Jet2 (LSE: JET2) have stronger balance sheets and more visibility among consumers.
Wizz, in particular, stands out to me. I like this airline because it has a cash-rich balance sheet and a relatively modern fleet of aircraft. The modern fleet means costs are lower and it can accommodate more passengers. These are the reasons why I would buy the company, but avoid peers IAG and easyJet.
Jet2 reported a substantial loss of £200m for the six months to the end of September. This was disappointing, but the company has a strong balance sheet, which can absorb losses. Excluding customer deposits, the group’s cash balance at the end of September was £1.5bn.
These numbers suggest to me that the company has the cash resources required to weather the current storm. The resources will also provide firepower for the group to capitalise on the market recovery when it eventually starts to take shape.
Growth potential
This is the primary reason why I would buy the stock over its competitors. Compared to other companies in the sector, like TUI, Jet2 already has a lot of brand value, and it can use its cash balance to boost its visibility to consumers. TUI’s financial position is much weaker. It has been bailed out three times during the crisis by the German government, and further restrictions could lead to yet another cash call.
Like Wizz, Jet2 also has the resources to buy and build a new fleet of aircraft to lower costs and offer a better level of service to consumers. In October, the company announced it had entered into agreements to acquire 51 planes. Wizz is also buying new planes, showing that the business is already looking forward to better times.
Despite their attractive qualities, I am conscious that both Jet2 and Wizz cannot survive if restrictions continue forever. If constraints do continue for the next couple of years, even these companies may start to struggle. This is the biggest challenge they face today.
Despite this risk, I would buy both of these travel stocks from my portfolio today.