As many consumers look forward to the summer months, investors look at travel and live experience stocks as a great way to balance their portfolios for later in the year. But which companies are best suited to take advantage of the post-pandemic demand for experiential spending?
Macquarie Senior US Lifestyle & Payments Analyst Paul Golding joins Yahoo Finance Anchor Julie Hyman for the latest installment of Yahoo Finance's Good Buy or Goodbye, helping investors navigate which vacation-adjacent companies are best for their portfolio.
I'm here with Paul Golding, Macquarie Senior US Lifestyle and payments analyst. Thanks for being here. Good to see you in person Paul, usually we talk remotely. So let's talk about your goodbye stock first of all. It's in the cruise industry, Royal Caribbean specifically. And like many of the cruise stocks, it's done pretty well over the past year because people are cruising and there's good forward bookings as well.
And you like the cruise industry but you say this company is really the best in class. Why is that?
And we also like the fact that they have been very good at managing their fuel exposure and the fuel hedge portfolio. So it's a variety of things around revenue cost margin, just doing well in general in our view.
JULIE HYMAN: Yeah and the deleveraging is interesting in particular because it's expensive to have a lot of ships. And a lot of these companies are pretty debt laden. So that's an important piece of it. Now overall, you do like the cruise industry and the value proposition that they would argue that, it's an all in one deal to take a vacation on a ship.
PAUL GOLDING: That's right. So pre-COVID cruising was about a 15% to 20% discount to a land based alternative for the same for type of trip. Coming out of the pandemic, it got as bad as 42 to a 45% discount. Royal Caribbean has been driving price and making that back. So we like them for that as well. But we still see some runway ahead for them to continue to shrink that discount based on the value that they provide.
Maybe ICASS services and luxury relative to what you would spend for a similar trip on land.
JULIE HYMAN: Interesting, I didn't realize the discount was so big. And then also, you're talking about new ship formats. You mentioned margin expansion. What is it about these new ship formats that makes bigger opportunities to make margin?
PAUL GOLDING: So as a lot of news has been generated around the launch of icon of the seas. This is the largest cruise ship in the world, but that also means the propulsion is more efficient. You can get more people on board, propelled by the same systems and the same hoteling outlay in terms of energy. But you also provide more opportunity for onboard spend.
Because the ship has more amenities, roller coasters and water slides, and various different amenities that make it so that the consumer wants on board can find more opportunities to spend money. And so that means that the margin profile for the business could expand over time as more ships with this format are put into service. And there's another ship coming Utopia of the seas this year, that is a large class ship.
JULIE HYMAN: Yeah, I was reading a little bit more about the icon of the seas today, on one of the water slides. In particular, there's an upcharge. Some of the restaurants, there's an upcharge. You can do quite a lot included in the price of the ship. But there's a lot of those opportunities as you talk about. We like to point out what the potential risks are to the bull case here.
And in this case, it could just be if there is a macro downturn. Let's talk about that first and then we'll get to the second point.
PAUL GOLDING: Sure. Macro headwinds, the consumer still needs to be interested in taking a trip and spending money on leisure services and consumer discretionary spend. So as we think about macro headwinds, the savings post pandemic have been strained, stimulus has run out. And we've seen other factors play on the consumer's propensity to spend, whether it be higher interest rates.
And maybe the delinquency data that we see coming out as a result of that. So over time as those things compound, there is the potential for these headwinds to subdue consumer's willingness to spend on travel.
JULIE HYMAN: And then what is the effect of these emission standards. I mean, speaking of icon of the seas for example, that is a ship but that because of its size, some environmental activists have been critical of it.
PAUL GOLDING: That's right. And in places like Europe, they've actually instituted a new emissions tax system. It's not new but the tax rate and the way that they Levy that tax is new for sailings within Europe. And so as more jurisdictions become more stringent around emissions from cruise ships or shipping in general, we could see that pose maybe a headwind to some sailings or pose a headwind to margin.
Not meaningful at the moment but could be more meaningful over time.
JULIE HYMAN: Something to watch.
PAUL GOLDING: Yeah.
JULIE HYMAN: And is this a stock that you own or the firm owns?
PAUL GOLDING: No.
JULIE HYMAN: OK, got you. OK. So let's get to the stock that you are avoiding and this is very resort. So from the seas to the mountains, we are going here with Vail. The first reason has gotten a lot of press recently and that is, there's no snow or there's less snow or it's difficult to predict how much snow is going to be. What effect is that having on Vail?
PAUL GOLDING: Yeah, so in the most recent season to date update for mid 23, 24 ski season, we heard from the company that skier visits were down 16% year over year relative to the same period last year. So 16% decline on the basis of not being able to open some runs or some resorts on time because of weather. Is a significant driver of some of these risks to their business model.
This also is indicative of the extent to which snowmaking can't necessarily replace good weather and good snow from nature.
JULIE HYMAN: Yeah, that makes sense. And then also, we're talking about barriers to growth. And this has to do both with new skier acquisition, because it's expensive to ski, it's difficult to learn how to ski. And then also expansion in terms of actual physical properties. So talk us through both of those briefly.
PAUL GOLDING: Sure. Well, skiing requires skill. It can be dangerous if you're unskilled. It can be dangerous, even if you're skilled.
JULIE HYMAN: If you are skilled, it's true.
PAUL GOLDING: And skiing can also require that you purchase rent equipment, spend money on that, travel to a resort. Whether that's travel by car to a mountain or for destination resorts which are the bread and butter of Vail. You have to fly to a mountain at a destination. And so the cost ends up becoming a barrier to growth as well as the actual nature of the activity.
JULIE HYMAN: And what about growth in terms of growing properties?
PAUL GOLDING: Yeah. Well, it's been about a decade where Vail and its key competitor have been consolidating the industry. Acquiring resorts in North America and driving growth that way through an organic acquisition. And so as we look at Vail lately, it's been acquiring resorts in Europe to keep the acquisition momentum going. But the North American pipeline has run a bit dry.
JULIE HYMAN: It's limited. And we should mention, by the way, when we talk about cost of entry. I mean, an epic pass. That is all in for the Vail Resorts is more than $1,000. Which I guess if you're skiing a lot, maybe it's a bargain but that's still a high price ticket. And then lastly, congestion, the resorts that are open that do exist are crowded.
PAUL GOLDING: That's right. We're neutral rated on Vail and have a $225 target price and that came into effect around the time that the company was introducing epic, one day, two day, three day passes and filling in the gap between a window pass and the unlimited pass. And what that's done is, it's created congestion on the mountains. That's been noted in the press quite frequently in the prior season.
The companies said that they're looking to make improvements this season. But as pass penetration continues to rise, it creates the potential for more congestion. And that decreases the guest experience relative to what is in, otherwise high price point leisure activity.
JULIE HYMAN: And then finally, the risk to this downcase. In other words, what could go right? Well, just that core affluent customers can be resilient. We've seen that so far. That's right and this is a relative risk, relative business case in terms of the investment holding better than other investments in the leisure space.
PAUL GOLDING: The affluent consumer is the bread and butter of Vail's customer base, in terms of being able to get people to the mountain and spending the money that it takes to ski. And so in a downturn, they tend to be more resilient than a middle to lower end consumer who may see more strain if macro conditions tighten.
JULIE HYMAN: The same time if the mountain is too crowded, maybe they'll take a different vacation entirely or go to Europe. Who knows? All right. Let's summarize the case that you've made for investors here. You're telling them by Royal Caribbean group, you view the company as best in class in the cruise industry and new ship formats could enable more margin expansion.
On the other side you say avoid Vail resorts based on the volatility. We've seen in weather barriers to New skier growth and congestion affecting the guest experience. Thanks so much really appreciate it, Paul Golding.
PAUL GOLDING: Thanks for having me.
JULIE HYMAN: And thank you for watching Good Buy or Goodbye. We'll be bringing you new episodes three times a week at 3:30 PM, Eastern.
