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  1. Home
  2. / Investing
  3. / Consumer Discretionary

Why Travel Stocks Could Be in Trouble Just as Vacation Season Begins

The latest data from Bureau of Economic Analysis is a bad sign for the travel industry.
By CHRIS VERSACE
Jul 01, 2018 | 03:00 PM EDT
Stocks quotes in this article: UAL, ALK, HTZ, HLT, H, WH, PLYA, RLH, BEL

Friday morning the Bureau of Economic Analysis reported on Personal Income and Outlays for the month of May. Given our growing concern over consumers and their ability to spend, this is a report that we tend to watch like a hawk. The good news is personal income jumped 0.4% in May, as expected, but personal spending fell short of expectations rising only 0.2% and the savings rate increased to 3.2% from the 2018 low of 3.0% in April.

The other key component of this report, and one that is closely watched by the Fed, is the Personal Consumption Expenditures (PCE) index, which rose 2.3% in the 12 months through May -- the biggest gain in over six years. Meanwhile, the core PCE Index, the Fed's preferred inflation metric, advanced 2.0% on an annual basis after gaining 1.8% in April. This would suggest inflation is playing out as the Fed expected, but we would also say that we continue to see a widening out of pricing pressures and price increases that suggest more inflation will be had in the coming months.

With prices climbing faster than wage gains, we have the makings of a slowdown in consumer spending especially given the debt levels consumers have amassed across credit cards, student loans and auto loans. This could wreak havoc with travel- related stocks such as United Continental (UAL) , Alaska Air (ALK) , Hertz Global (HTZ) , Hilton Worldwide (HLT) , Hyatt Hotels (H) and Wyndham Hotels & Resorts (WH)  as we gear into the summer vacation season. With rising fuel costs, airlines are likely to see some margin pain in the short term, which likely means they'll underperform. We don't have that problem with car rental companies, but the year-over-year increase in gas prices could put a crimp in some travel plans. While hotels may feel the indirect pinch of higher gas prices, they are dealing with another problem all together -- the sharing economy and Airbnb.

As anyone who has stayed at a hotel recently knows, there is a tax component to the final bill. In my experience, it tends to be snuck in at the end and can pack quite a wallop depending on where one is staying. For example, the hotel room tax in New York City is 14.75%; in California it's 14%.

That helps explain the allure of Airbnb to consumers who are contending with pressured disposable income as they service student debt, auto loan debt and credit card debt in what is an increasing interest rate environment. But... of course there was a "but" coming... it's given rise to a competitive playing field toward Airbnb- listed properties vs. hotels. There are also the mounting complaints over how the short-term rental market, like the one that is Airbnb's bread and butter, is not good for neighborhoods. And that's before we talk about zoning and other safety standards.

This is something to watch in Washington, D.C. over the summer months to see if this notion of crony capitalism -- giving one business preferred treatment -- is addressed. Until it is, it's something that is poised to weigh on hotel occupancy rates, a key determinant of their profitability and EPS generation.

Unless this is addressed, Airbnb is poised to weigh on hotel occupancy rates, a key determinant of their profitability and EPS generation. From a Stocks Under $10 perspective, should the above play out it means keeping tabs on certain hotel stocks, such as Playa Hotels (PLYA)  and Red Lion Hotels (RLH)  as well as Belmond Ltd. (BEL)  that could fall under our investing strategy purview in the coming months.

This commentary was originally sent to subscribers of TheStreet's Stocks Under $10. Click here to learn more about this portfolio, trading ideas and market commentary product.

-- Chris Versace and Stephen "Sarge" Guilfoyle are co-portfolio managers of Stocks Under $10.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Versace and Stocks Under $10 had no positions in the securities mentioned.

TAGS: Investing | U.S. Equity | Regulation | Markets | Transportation | Consumer Discretionary | Economic Data | Economy | How-to

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