By Danilo Masoni
MILAN (Reuters) - European travel stocks stumbled into some profit-taking as earnings season kicked off and extreme weather hit in July, but many investors are betting relatively attractive valuations and solid demand will keep supporting the sector.
An index of European travel and leisure stocks has risen 33% over the last year, beating even market favourites like luxury and defence and racing over 23 percentage points ahead of the broader market.
The index has fallen slightly from its May peaks, but is still one of the best performers this year, thanks to sharper price increases in items like airline tickets and hotel rates as COVID-19 curbs were phased out ahead of the summer holidays.
"For many people, the pandemic is now over, and this is time now for travelling far from home," said Corinne Martin, fund manager at Ofi Invest in Paris.
Airlines, cruise operators and hotel owners have been key beneficiaries, but so have aircraft and engine-makers. The recovery in long-haul flying helped Rolls-Royce (LON:RR) lift its full-year forecasts, sending its shares up over 20% on Wednesday.
The number of restriction-free countries has risen three-fold in one year to above 180 and international tourist arrivals are closing in on pre-panademic levels, according to data from the World Tourism Organization. Europe is among the regions with most progress.
The point at which China announced the end of health restrictions in 2022 was probably the best moment to jump into travel stocks. The STOXX travel index gained 20% in the first quarter of the year, the most since the roll-out of COVID vaccines in the final quarter of 2020, when it rose 29%.
Traders still see more opportunities ahead, even as markets face growing macro uncertainty and Europe grapples with extreme weather.
Headwinds facing Chinese travellers like passport delivery delays and expensive fares should progressively level off, Ofi's Martin said. The Paris Olympics and the UEFA European Football Championship in Germany next year will also support growth.
"The global industry outlook looks good for 2024, but there's probably less room for good surprises," Martin said.
"Business travel still has room to catch up but is also highly sensitive to an economic slowdown."
Goldman Sachs expects significant upgrades to consensus earnings estimates this year. For 2024, it sees the debate shifting to the durability of current trends, with rising UK unemployment leading to a moderation in leisure demand growth.
PEOPLE WANT MORE HOLIDAYS
Ryanair (IR:RYA), Europe's largest airline by passenger numbers, posted record profits last week and said demand looked robust for the rest of the summer, although it cautioned tariff growth could soften. It saw no sign of a change in booking habits due to the heatwave in southern Europe.
BofA analysts said Ryanair's fare outlook was conservative. They remain buyers, noting how at 11 times 2024 earnings, the stock displays an unjustified discount and prices no growth.
Investors have been lured by signs that consumers have kept spending money on travel, even as a cost-of-living crisis has forced them to cut spending on other discretionary items.
"Now, vacation budget is no more a variable families adjust," said Jerome Schupp, fund manager at Prime Partners in Geneva.
Schupp invested in Visa (NYSE:V), betting on customers using their credit cards abroad. He also turned to bond markets for exposure to airlines, lured by rich yields and after cash calls from carriers like Air France (EPA:AIRF) stabilised their finances.
Amundi small and midcaps fund manager Cristina Matti said their portfolios still had more exposure to hoteliers than to airlines, adding she would be surprised if current newsflow about the weather led to huge cancellations.
Andrea Scauri, fund manager at Lemanik, said airlines faced volatile fuel prices and staff industrial action, so he opted to play the recovery trough stocks like travel agent Lastminute (F:09B).
"After two years of COVID, of smartworking at home, people have realised they want to take more holidays. It seems quite obvious that this is a strong trend," he said.
European travel and leisure earnings are seen rising 63% this year and 23% in 2024, according to Refinitiv Datastream. Both are above rates expected for the broader market.