Missed The Rally In Hotel Stocks? Pick Royal Caribbean To Extend Gains

With the approval of Pfizer and Moderna’s vaccines in December 2020, the shares of prominent hospitality companies Hyatt (NYSE: H), Marriott, and Hilton extended strong gains driven by expectations of a quick recovery in travel demand. Interestingly, hotel stocks have reached their pre-Covid levels after the last week’s rally while the shares of cruise lines, Royal Caribbean (NYSE: RCL), Carnival, and Norwegian Holdings remain subdued. Does this indicate a buying opportunity in RCL? Trefis compares the historical stock price trends between hotel stocks and Royal Caribbean Cruise in an interactive dashboard analysis, H Stock Has 56% Chance Of A Rise Over The Next Month After Rising 5.2% In The Last 5 Day.

Royal Caribbean has better fundamentals than Hyatt

Before the pandemic, Royal Caribbean’s revenue growth was much stronger than Hyatt, propelled by rising capacity and a stable occupancy rate. Royal Caribbean’s revenues increased by 24% from $8.7 billion in 2017 to $10.9 billion in 2019, versus a 12% growth in Hyatt’s revenues over the same period. As Hyatt has been selling its owned hotels to grow its franchise business, the net margins are affected by gains or losses. Therefore, we compare the operating cash flow margin to identify better cash generation capabilities.

In 2019, Hyatt and Royal Caribbean reported an operating cash flow margin of 8% and 34%, respectively. Hyatt incurred $611 million of operating cash outflow in 2020 compared to $396 million of operating cash generation in 2019. However, Royal Caribbean incurred $3.7 billion of operating cash outflow compared to $3.7 billion generation in 2019. Thus, Royal Caribbean can recoup its pandemic losses within a year as compared to a greater period required by Hyatt.

Hotel and cruise line stocks have outperformed broader markets this year

In the past twenty-one days, Royal Caribbean, Hyatt, Marriott, and Hilton stocks have gained 35%, 28%, 22%, and 19%, respectively. Looking at the past five-day and ten-day performance, the rally seems to be growing stronger despite a stagnation observed in broader markets. Also, cruise companies have been observing pent-up demand for the second half of 2021. Given the ongoing momentum in the travel sector, we believe that Royal Caribbean stock has significant room for growth.

As the slump in travel demand continues to weigh on the hospitality sector, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Expeditors International vs. LGI Homes shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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