Travel + Leisure has had an impressive run over the past six months as its shares have beaten the S&P 500 by 9.8%. The stock now trades at $61.84, marking a 21.7% gain. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Travel + Leisure, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.
Why Is Travel + Leisure Not Exciting?
Despite the momentum, we don't have much confidence in Travel + Leisure. Here are three reasons we avoid TNL and a stock we'd rather own.
1. Weak Growth in Tours Conducted Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like Travel + Leisure, our preferred volume metric is tours conducted). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Travel + Leisure’s tours conducted came in at 200,000 in the latest quarter, and over the last two years, averaged 6.8% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.
2. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Travel + Leisure’s ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Travel + Leisure’s $7.61 billion of debt exceeds the $240 million of cash on its balance sheet. Furthermore, its 8× net-debt-to-EBITDA ratio (based on its EBITDA of $970 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Travel + Leisure could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Travel + Leisure can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Travel + Leisure isn’t a terrible business, but it isn’t one of our picks. With its shares topping the market in recent months, the stock trades at 8.5× forward P/E (or $61.84 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at the most entrenched endpoint security platform on the market.
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