I find it interesting that the financial community is making much about the various drug companies working on coronavirus vaccines. History suggests that 90-180 days from now the outbreak will be off the radar and the global economy will be bouncing back. I am not sure a SARS vaccine, for instance, has much financial value these days. These strands of virus tend to have one-off impacts.
Much like during the SARS outbreak, or after the 9/11 attacks, travel stocks are taking it on the chin right now. As a long-term contrarian investor, I cannot help but allocate some existing cash balances into these stocks. 2020 will be a throwaway year from a financial perspective and the markets should relatively quickly refocus on 2021 and a more normalized operating environment.
Does it matter which companies one targets? In many cases, probably not. Having already held Expedia (EXPE), and being only more excited after hearing Barry Diller’s plan to reinvigorate the company’s business, I can’t help but be elated that the post-earnings rally we saw earlier in the month has now been given back completely. I am modeling $10 of free cash flow per share in 2021 (assuming a normalized economy) and the stock is fetching $105. Plug in your expected multiple of FCF and calculate the upside accordingly.
Booking Holdings (BKNG) has more international exposure and reports after the bell today. At $1,675 and about $100 of per-share free cash flow, that one is worth watching as well.
I have also been looking at the cruiseline sector and already had global market leader Carnival (CCL) on my watchlist pre-virus due to a depressed stock price (due to a large capex cycle depressing free cash flow generation). I have begun accumulating shares, as the single digit P/E ratio and dividend yield north of 5% (payout ratio of less than 50% on normalized earnings) appear favorable to historical levels.
To be clear, I am not predicting how bad coronavirus will be, or when travel-related stocks will bottom. Instead, I am taking my normal 2-3 year (minimum) holding period assumption and making a bet that buying high quality travel companies during times of near-term distress will pay off over the long-term. History suggests it will.