Jharonne Martis
July 26, 2021

Resurgent COVID-19 Pressuring Airline, Hotel, Entertainment Stocks

by Jharonne Martis.

Refinitiv has seen big spikes in Eikon Usage data for airline, hotel and entertainment stocks as vaccination rates continue to rise (See exhibit 1).  Both the number of Eikon users and stock hits for these stocks have been on the rise and are considerably higher compared to pre-pandemic levels. The strong and positive correlation between the data sets is significant, underlying users’ prospects on the re-opening trade.

Exhibit 1: U.S. Vaccinations % of Population vs. Airline, Hotels & Entertainment stocks views on Eikon

Still, as COVID concerns return, these re-opening stocks keep being pushed back. These industries remain vulnerable as new variants, including the Delta variant, spread and cause spikes in COVID-19 cases. This is putting pressure on countries to maintain border restrictions, affecting travel. The travel industry might also face increased scrutiny due to President Biden’s July 9 Executive Order on Promoting Competition in the American Economy.

Due to these headwinds, analysts polled by Refinitiv believe 2021 will be more of a transition year and then we might start seeing a recovery in 2022/2023.

U.S. airlines

On average, the major U.S. airlines’ Q2 2021 revenue estimates show a significant improvement from the 2020 pandemic levels (Exhibit 2). Still, due to the headwinds mentioned above, Q2 2021 revenue estimates are still below pre-pandemic levels, suggesting we won’t see a liftoff at least until international border restrictions ease and business travel resumes. On average, the airlines’ revenue is expected to improve in FY 2021, but still stay below pre-pandemic levels.

Exhibit 2: Average U.S. Airlines Revenue 2019 Actuals  – 2021 Estimates

On average, the U.S. airlines continue to operate at a net loss. They are expected to narrow their net loss later in FY 2021 (Exhibit 3).

Exhibit 3: Average U.S. Airlines Net Income 2019 Actuals – 2021 Estimates

Source: Refinitiv I/B/E/S

American Airlines just recently shared preliminary earnings for Q2, which weren’t as bad as expected.  The StarMine Analyst Revisions Model (ARM) is highly predictive of both the direction of future revisions and price movement. Recently, American Airlines’ ARM score jumped from 69 to 99 out of a possible 100, suggesting analysts became generally positive and fairly bullish on the stock again (Exhibit 4).  Similarly, Alaska Air, Southwest and Delta Airlines have high ARM scores, suggesting that analysts are likely to revise earnings estimates upwards.

Exhibit 4: Airlines StarMine Model Scores


Source: Refinitiv Eikon

Entertainment industry

When comparing the three industries to pre-pandemic levels, there are some individual entertainment companies that appear to have experienced faster revenue improvement from the 2020 pandemic. Within this group, Caesars Entertainment and Tencent Music have pulled through with Q2 2021 revenue estimates above pre-pandemic levels (Exhibit 5). However, Caesars and the bulk of the entertainment companies are still operating at a net loss. Tencent Music has financially performed the strongest within this group. However, analysts polled by Refinitiv are concerned about China’s new regulations that could affect the company, and they have become bearish on the music company (Exhibit 6).

Exhibit 5: Entertainment Industry Revenue and Net Income: 2019 Actuals – 2021 Estimates

Source: Refinitiv I/B/E/S

Caesars Entertainment also boasts a high StarMine ARM score of 89, suggesting that analysts are likely to revise earnings estimates upwards.

Exhibit 6: Entertainment Industry StarMine Model Scores

Source: Refinitiv Eikon

U.S. hotels

On average, major U.S. hotels’ Q2 2021 revenue estimates show a significant improvement from the 2020 pandemic levels (Exhibit 7). Still, due to pandemic and travel headwinds mentioned above, Q2 2021 revenue is still below pre-pandemic levels. Due to pent-up demand, the sector is expected to see an improvement in revenue and traffic in the second half of the year. On average, hotels’ revenue are expected to continue to rise in 2021 but remain below pre-pandemic levels.

Exhibit 7: Average U.S. Hotel Revenue: 2019 Actuals – 2021 Estimates
Source: Refinitiv I/B/E/S

On average, U.S. hotels’ net income is also expected to hit positive territory this year but remain below pre-pandemic levels (exhibit 8).

Exhibit 8: Average U.S. Hotels Net Income: 2019 Actuals – 2021 Estimates
Source: Refinitiv I/B/E/S

Analysts polled by Refinitiv are most bullish on Marriott International (Exhibit 9), which has the highest StarMine ARM score at 82. Marriott’s loyalty program has worked in its favor and is a consumer’s favorite. As a result, the company has already witnessed improvement in booking rates.

Exhibit 9: U.S. Hotel Industry StarMine Model Scores


Source: Refinitiv Eikon

The pulse on the consumer

There’s been a spike in consumer spending since March, boosted by higher vaccination rates, tax refunds and government stimulus checks. The influx of cash pushed consumers to pay off credit, and purchase and repair new homes. The housing market continues to be on fire. This earnings season, U.S. banks said that they continue to grant more mortgages vs. the previous quarter.

Pressured with growing inflation and a surge in delta variant cases, consumers are spending most of their money on household durables in the second quarter. Refinitiv is looking at an estimated 73.5% Q2 growth rate for this sector, suggesting consumers continue to invest in the stay-at-home experience.

Retailers are also offering less-than-usual discounts because of strong demand and supply issues. Despite the weaker-than-usual discounts, consumers are still opening their wallets. And, although malls are reopening across the U.S., consumers are still gravitating online to have items delivered at home, a habit that was strengthened during the pandemic.

The delta variant is also putting a damper on U.S. consumer confidence, causing the latest reading on the Refinitiv/Ipsos Primary Consumer Sentiment Index to drop for the first time this year (exhibit 10).

Exhibit 10: The Refinitiv/Ipsos Primary Consumer Sentiment Index


Source: Eikon

E-commerce

The amount of money consumers spend online continues to grow. Several factors, including the pandemic and growing use of mobile phones, have contributed to the shift towards e-commerce and likely will only increase. In 2010, e-commerce transactions made up 4.2% of total retail sales. That percentage grew to 13.6% in 2020, and is forecasted to rise to 14.9% in 2021, according to Refinitiv IFR.

The U.S. government reported a record $215.0 billion in Q1 2021 retail e-commerce sales, a 39.1% increase from a year ago. The Refinitiv forecast suggests that e-commerce sales will continue to see double-digit growth over the next quarters, indicating that consumers continue to gravitate online despite pandemic restrictions being lifted (Exhibit 11).

Exhibit 11: E-commerce as a percentage of total U.S. Retail Sales 1999 Actual – Dec 2021 Estimate

For more watch the latest episode of Refinitiv Data on the Data:

https://www.youtube.com/watch?v=whmIwXKhQBo

 

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