Australia’s travel stocks are in turmoil – are they a buy or too risky?
Australia's travel stocks are down more than 50% since the February peak, can they survive the fallout?
Just a year ago, Australian tourism stocks were looking pretty peachy as a whole. Tourism numbers had been steadily climbing, tourism spend was going up and airport stocks such as Sydney Airport were widely considered among the "recession-proof" stocks.
How quickly things can change.
In the last month, the Qantas (QAN) share price has fallen around 53%, Virgin (VAH) has dropped 47%, Webjet (WEB) has dropped 68% and Flight Centre has fallen 59%.
ASX travel stocks (17 Feb - 17 Mar)
- Qantas (QAN): -53%
- Virgin (VAH): - 46.9231%
- Webjet (WEB): -67.87
- Flight Centre Travel (FLT): - 59.2%
- Sydney Airport (SYD): -43%
- Auckland Airport (AIA): -37%
The extraordinary sell-off is thanks to the spreading pandemic and subsequent travel restrictions sweeping the globe.
I don't need to go into detail about the struggle the travel industry is facing. We can all see that tourism is suffering enormously in all major cities. On the upside, we assume it won't last forever and some of the hardest hit stocks will reverse.
Are they a buy at these prices?
With travel stocks as low as they are, investors will be asking if it is too late to sell out and if they have further to drop.
Among the major brokers, ratings have been mixed on travel stocks. Tuesday (17 March) UBS rated Qantas a "buy" and set its price to $6.80, while it rated Virgin a "hold" at $0.12 the day prior, although well above Tuesday's closing price of $0.005.
Webjet was rated on 12 March by major brokers Morgans, Credit Suisse, UBS, Morgan Stanley and Ord Minnett, with target prices swinging from $7.30 all the way to $18.
But according to managing director of Medallion Financial, Michael Wayne, investing in airlines is simply too big a risk to take in their current state.
"At the best of times, these are difficult businesses to operate, with many variables affecting ultimate performance," Wayne told Finder.
"Competition is intense and margins are tight, and history is littered with the names of airlines who have gone broke."
Bell Direct's market analyst Jess Amir agrees that there are too many uncertainties to be jumping back in quickly.
"How long is this [pandemic] going to be around? We don't know. Are there going to be more cuts to their routes and more staff cuts? We don't know," said Amir.
"Is travel and tourism a screaming buy? I'm not going to say yes. Because we don't know if this is the bottom.
"It's not going to go on forever, but is it a buying opportunity? I'd approach with caution."
Could our airlines go under?
On Tuesday, the Centre for Aviation (APA) released a bleak statement suggesting that most global airlines would be bankrupt by May if governments didn't step in with emergency assistance.
Wayne told Finder that with continents in lockdown, there's a high probability airlines will require bailouts, and the impact on shareholder is uncertain.
With Virgin down 7% Tuesday alone, the market appears to be pricing in that very possibility.
"Virgin has far more debt on the balance sheet than assets, and if the credit markets are anything to go by, the future of that business could well be called into question," said Wayne.
At the same time, airlines are cancelling major routes, with Qantas and Jetstar announcing a cut of 90% of major international services for the next 2 months.
Which travel stocks are set to survive?
Wayne thinks Sydney Airport (SYD) is a stock to keep for the long run and a potential "buy" at low prices.
"Recent declines make the company appealing. Over time, we would expect international travel to normalise and SYD to rebound off the back of that," said Wayne.
"SYD used to be highly geared when it was owned by Macquarie Bank. However, over time, its leverage ratio has been falling and is expected to continue to decline into the future. The improved balance sheet has been confirmed by Moody’s and Standard and Poor’s which has upgraded SYD’s credit rating at consistent intervals in recent years."
Brokers Credit Suisse, Ord Minnett and Macquarie labelled SYD a buy this week, with prices ranging from $5.8 - $7.94.
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