This article is part of Morningstar's Guide to Financial Christmas Gifts. As you consider whether your friends and family have been naughty or nice we'll be revealing all you need to know about financial gifts for Christmas.
The Chancellor George Osborne confirmed in the Autumn Statement last month that fuel tax will be frozen and vowed to pass on the fall in oil prices to drivers. As part of a number of measures aimed to alleviate the strain on consumers’ budgets, Osborne also abolished air passenger duty for children aged under 12, and announced plans for this to be extended to children aged less than 16. Airplane and travel operators saw their share prices jump after this measure was announced.
Add to this, travel companies are set to receive a festive boost to revenues as the holiday season begins – making these stocks potentially attractive investments.
Using Morningstar Select we screened for airline, transportation, travel and leisure stocks and reveal what Morningstar equity analysts think of these stocks below.
Rolls Royce (RR.)
Rolls-Royce is one of only four firms in the world that can successfully develop and manufacture commercial narrow-body jet engines, a key reason we think the company stands to benefit from sizable competitive advantages in its end markets. That said, we see a few growth headwinds for Rolls-Royce; defence spending is coming under pressure globally and the company lacks a presence in the next generation of commercial narrow-body aircraft. Alliances and joint ventures abound in the commercial aerospace engine market, where a partner on one platform may be a competitor on another.
InterContinental Hotels (IHG)
InterContinental has an attractive high-return on invested capital, recurring-fee business model, with significant switching costs for its property owner customers; more than 99% of the hotels in its system are franchised or managed hotels. Franchised and managed hotels typically have contracts of 10-30 years, require minimal capital expenditures, and offer operating margins in excess of 80% for franchised properties and more than 40% for managed properties.
Property owners face significant switching costs if they exit the company's system, as there are considerable costs associated with reconfiguring a hotel to meet the requirements of another brand and to rebrand a hotel, along with a major disruption to property owners' operations.
Carnival (CCL)
Carnival is the largest company in the cruise industry, operating 10 global brands with 100 ships in service and passenger capacity of around 200,000, allowing the firm to reach a diverse group of consumers in a lightly penetrated vacation segment. Efficient scale, the lowest unit costs in the industry, and intangible brand assets provide the company with a narrow economic moat. Analysts believe Carnival's market remains underpenetrated with only about 25% of domestic population ever having cruised, according to the Cruise Lines International Association.
With low domestic penetration rates and even lower international recognition, upside potential remains significant. Additionally, Carnival has the best ability to capitalize on underserved markets like Asia Pacific and Latin America, where we believe it could succeed in the years ahead, thanks to its global reach and tailored fleet.
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