I don’t need me to tell you 2020 has been a horrible year so far for any travel and leisure-related stocks in the FTSE 100.
Among the biggest casualties of the coronavirus pandemic have been Intercontinental Hotels (LSE: IHG) and Premier Inn owner Whitbread (LSE: WTB). Their shares are now down 34% and 43% respectively compared to the start of January. Go back to mid-March and they were even lower.
With lockdowns gradually lifting around the world, however, is now the time to buy in?
More disruption ahead
Today’s Q1 update from Intercontinental has barely budged the share price. This suggests the market’s expectations on how awful the numbers would be weren’t wide of the mark.
Revenue per available room — the hotel industry’s preferred performance measure — fell just under 25% in the quarter, compared to the same period in 2019. Unsurprisingly, March was a nightmare month for the FTSE 100 member. Revenue tumbled 55%, due to the implementation of travel bans and social distancing.
Based on the company’s predictions for April, Q2 is likely to be even worse. Revenue last month is estimated to be 80% lower, which makes sense given that 1,000 of Intercontinental’s hotels were shut.
Commenting on today’s numbers, CEO Keith Barr said the coronavirus is “the most significant challenge both IHG and our industry have ever faced” and that Intercontinental expected “continued disruption in the months ahead.“
Contrarian FTSE 100 buy?
There were, however, a few chinks of light. The company has, for example, seen lower levels of revenue decline than the industry as a whole in the US. It attributed this to being less dependent on international travel and big events to make money than in other parts of the world.
As you might expect, Intercontinental has also been proactive in slashing costs and now has a decent cash pile at its disposal. Encouragingly, the company believes it can continue to operate “for at least 18 months in a theoretical ‘zero occupancy’ environment.” This gives me confidence that now might be the time to at least start building a position in the £6bn-cap.
An expected earnings per share decline of 26% in 2020 leaves the stock on a P/E of 18. That’s not cheap if we assume that travel is going to be disrupted for months to come. That said, I’d still be more inclined to buy Intercontinental over its FTSE 100 peer.
Limited upside?
I’ve long considered Whitbread over-priced, especially after it sold its popular Costa Coffee brand to Coca Cola. I’m not sure my opinion has changed, even after the share price decline witnessed in 2020.
Don’t get me wrong, there are things to like. It is, after all, the UK’s leading hotel business. The firm is also growing its presence in Germany which, incidentally, has already begun easing lockdown measures.
Based purely on quality metrics, however, it’s clear Intercontinental is a better investment. Even when running optimally, Whitbread makes consistently lower returns on the money it feeds into the business.
Intercontinental also has multiple great brands and hotels around the world. All this goes some way to explaining why it features in Terry Smith’s incredibly popular Fundsmith Equity Fund. And Whitbread doesn’t. I’d opt for Intercontinental. A P/E of 17 for FY21 still looks a bit too dear to me.
