Cheap fuel helps lift travel-related stocks

Select resort operators and airlines are reaping the benefits.

Michael Leonard 14 January, 2016 | 6:00PM
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We are painfully aware of companies and industries that have been directly or indirectly hurt by the precipitous drop in the price of oil from more than US$100 per barrel in autumn 2014 to about US$31 currently. But what about industries that benefit from cheap fuel? Intuitively, the travel industry must be enjoying lower costs, and a review of the list of U.S. equities highly rated by Morningstar's CPMS division would seem to confirm this thesis.

Among the apparent beneficiaries of lower travel costs is Vail Resorts Inc. (MTN), which develops real estate and owns and operates luxury resorts in Colorado, California, Nevada and Utah. Following Vail's Dec. 7 report for the three months ended Oct. 31, its earnings surprise is 5.4% and its quarterly earnings momentum is 20%. These figures inspired all six equity analysts who cover MTN to raise their estimate of fiscal 2016 earnings following the earnings release.

Consequently, investors in growth- and momentum-oriented U.S. equities should be attracted to Vail Resorts. Vail also rates highly for those seeking equities sporting attractive dividend growth, given its 2.1% expected dividend yield, 0.8 five-year beta and its multi-year record of healthily growing earnings and dividends.

Elsewhere, the combination of growing demand from travellers and savings on fuel costs has helped the airline industry take flight. In October, the International Air Transport Association (IATA) reported a 7.5% increase in year-over-year global air travel, while domestic U.S. air travel grew at 6.9%.

Combine this data with a sharp decrease in jet fuel prices and it should surprise no one that U.S. airline stocks Delta Air Lines Inc. (DAL), American Airlines Group (AAL) and  Southwest Airlines Co. (LUV) are highly rated in CPMS U.S. strategies.

Of that fleet of stocks, Delta should appeal to the widest spectrum of investment styles. Serving more than 325 destinations in 57 countries on six continents, Atlanta-based Delta is rated a Buy for investors of growth, value and momentum stocks.

Earnings growth is one factor fuelling these ratings. For the fiscal third quarter of 2015, Delta's quarterly earnings grew by 14.6% versus the same quarter one year earlier, while fourth-quarter earnings are expected to have risen 9.7% -- the company next reports its quarterly results on Jan. 19. Furthermore, four of the eight equity analysts following Delta have raised their fiscal earnings estimates within the past 30 days, which is usually an optimistic sign for any company leading into an earnings report.

Remarkably, Delta first appeared on the radar for value-oriented investors in February 2012 and has consistently maintained its attractive profile in the four years since then, while returning 328%. In addition to its excellent earnings profile, this is due to a trailing price-to-earnings multiple of 11 times, which is lower than most stocks in the CPMS U.S. equity universe.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
American Airlines Group Inc16.89 USD-5.22Rating
Delta Air Lines Inc39.31 USD-3.46Rating
Southwest Airlines Co44.23 USD-1.95Rating
Vail Resorts Inc229.38 USD-2.49

About Author

Michael Leonard

Michael Leonard  Michael Leonard, CFA, is chief equity strategist at Morningstar Canada.

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