Legendary investor Peter Lynch developed a simple but interesting chart to measure how a stock’s price compares to its intrinsic value. The chart compares stock price, price at a price-earnings ratio of 15 and price at median price-earnings without non-recurring items.
If a stock’s price is trading below its price at a price-earnings ratio of 15, it is likely to be undervalued. On the other hand, if it trades above its price at a price-earnings ratio of 15 but below its price at median price-earnings without non-recurring items, it may be in fair value territory. Any price above both of these lines indicates overvaluation.
As the novel coronavirus, also known as Covid-19, continues to weigh on markets, the travel sector has taken a harder hit than most. On March 5, the S&P 500 was down approximately 10.7% from its high on Feb. 19, with seven out of 10 of the worst performers being travel-related stocks.
While it is undeniable that companies tied to the travel industry will see lower profits over the next few quarters as people seek to reduce their exposure to unfamiliar places and people, their businesses are by no means going to cease forever. In fact, for value investors, now is the time to go shopping in order to reap the biggest rewards when travel picks back up.
According to their Peter Lynch charts, Booking Holdings Inc. (BKNG, Financial), Carnival Corp. (CCL, Financial) and Southwest Airlines Co. (LUV, Financial) are now trading at a much lower price than their intrinsic value. These companies also have higher financial strength than most of their competitors, which will make it easier to recover from short-term losses.
Booking Holdings
Booking Holdings is a world leader in online travel services, providing booking services for everything from flights and cars to hotels and vacation packages. Gross bookings have increased every year since 2008, with over $92.7 billion in gross bookings during the 2018 fiscal year. As bookings and site views have declined on coronavirus fears, the share price for Booking Holdings has dipped below the Peter Lynch earnings line and into undervalued territory.
Since this company is more of a pick-and-shovel play on the travel industry, fewer investors are panic-selling their shares, but the stock is still down approximately 15.24% since Feb. 19. On March 5, shares traded around $1647.15 for a market cap of $67.65 billion and a price-earnings ratio of 14.65.
Booking Holdings had released negative guidance tied to the coronavirus. According to CEO Glenn Fogel, the company expects a “significant and negative impact” on its first quarter of 2020. Room nights are expected to be down as much as 10%, while the company estimates that total gross travel bookings will decline 15%.
“We will continue to participate in those paid channels that provide us quality traffic and attractive ROIs, recognizing that we need to incorporate higher cancellation rates in our bidding calculations,” Fogel said.
GuruFocus has assigned Booking Holdings a financial strength rating of 6 out of 10. The Altman Z-score of 6.19 and current ratio of 1.58 indicate both short-term and long-term stability. The interest coverage of 20.09% and cash-debt ratio of 0.74 are higher than 60.74% of competitors.
Carnival
With approximately 50% of the total market share for the cruise industry, Carnival is the largest publicly traded cruise company in the world. According to the Peter Lynch chart, the stock is now undervalued compared to its earnings from any year going back to 2015.
While it’s nearly impossible to quarantine everyone in a city during a virus outbreak, quarantining a ship requires a simple refusal to allow its passengers to step on land. This has already happened to passengers aboard the Diamond Princess, who experienced a coronavirus outbreak on Feb. 3. Another Carnival ship, the Grand Princess, was forced to delay its return to San Francisco after one of its passengers from a previous voyage on the ship tested positive for the disease. As a result, Carnival shares are down a whopping 35.68% since Feb. 19. On March 5, shares traded around $27.87 for a market cap of $19.91 billion and a price-earnings ratio of 6.44.
Since the beginning of the outbreak, Carnival has been forced to suspend all cruise operations leaving from ports in China and a significant portion of cruises leaving from other parts of Asia. If there is an outbreak of the virus on one of its ships, it will also need to reroute ships, pay any extra associated expenses for quarantine and compensate guests for the negative experience.
“While not currently planned, if the company had to suspend all of its operations in Asia through the end of April, this would impact its fiscal 2020 financial performance by $0.55 to $0.65 per share, which includes guest compensation,” a company representative said in a statement.
Carnival has a GuruFocus financial strength score of 5 out of 10, which is higher than its main competitors, Royal Caribbean Cruises (RCL) and Norwegian Cruise Line Holdings (NCLH). The interest coverage of 15.91% is a positive sign. The cash-debt ratio of 0.11 and the current ratio of 0.23 indicate that despite its strength relative to competitors, Carnival may have trouble paying its short-term debt. However, the company faced a similar stock price plunge during the Great Recession, which it survived despite having a cash-debt ratio of 0.05 and a current ratio of 0.27 at the time.
Southwest Airlines
Headquartered in Dallas, Southwest Airlines is the world’s largest low-cost carrier. It operates primarily in the continental U.S., though it also serves routes to Hawaii, Mexico and the Caribbean. Despite its lack of international flights compared to major competitors such as Delta (DAL) and American Airlines (AAL), Southwest shares have lost 21.27% of their value since Feb. 19. On March 5, shares of the company traded around $44.96 for a market cap of $23.16 billion and a price-earnings ratio of 10.56.
Coronavirus travel fallout has caused a "very noticeable, precipitous decline in bookings,'' CEO Gary Kelly said in an interview with CNBC. The dramatic drop in demand caused Southwest to warn investors that first-quarter revenue would be down approximately $200 million to $300 million compared to previous guidance.
On Thursday, the International Air Transport Association upped its estimates of the virus’ total global toll on the air transport industry from $29.3 billion to $63 billion to $113 billion.
Southwest has been feeling the pain despite not having flights to Asia or Europe, where the vast majority of the outbreaks have occurred. In fact, its 21.27% drop is right there with Delta’s 23.07% (though not as steep as American Airlines’ 43.38% loss).
Southwest Airlines has a GuruFocus financial strength rating of 7 out of 10. Its cash-debt ratio of 1.02 and interest coverage of 35.63% are beating 77.66% of industry competitors. Although the current ratio of 0.67 is low, the Altman Z-score of 2.99, which measures long-term financial stability, is high compared to the company’s historical score.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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