Investors haven’t had much to celebrate in 2022, with all major indexes likely to see the year in the red. As 2023 begins, uncertainty rules; many are predicting a recession next year, either mild or short-lived.
But as usual, there are bright spots for investors to focus on, and analysts at Morgan Stanley are quick to point them out. Ravi Shanker, an expert in the travel and leisure industry, in a recent note noted the headwinds of the past few years – and went on to explain why next year will be better. Shanker said, “2023 could be a ‘Goldilocks’ year for US Airlines when market conditions are ‘just right’. The past three years have seen extreme conditions – 2020 and 2021 were ‘very cold’ due to the ongoing pandemic and 2022 was ‘very hot’ with subdued demand and inflation.
We can take advantage of Morgan Stanley’s travel and leisure stock outlook by focusing on two of the firm’s ‘Top Picks’ for 2023. Both are prominent in the travel and leisure sector and both bring a combination of a strong, high-sounding buy estimate for the coming year. Here are their details, from the TipRanks database, along with commentary from Morgan Stanley analysts.
Delta Airlines, Inc. (sprout)
First, Delta Airlines, is an old blue-chip stock and one of the industry’s major legacy carriers. Operating from its main hub in Atlanta, Georgia, Delta boasts approximately 4,000 daily flights to more than 275 destinations worldwide, including over 500 weekly flights to Europe. With a market capitalization exceeding $21 billion and approximately $29 billion in annual revenue, the company possesses deep financial resources.
This was clear from the quarterly results of the third quarter of the 22nd. Delta reported a second straight quarter of earnings, with adjusted EPS of $1.51 coming in well above $1.44 from the second quarter and $0.30 from the year-ago quarter – although we should note that the end 3Q22 just missed the forecast of $1.53.
At the top, revenue came in at $13.97 billion and the company saw cash flow of $869 million. These solid results were driven by a combination of increased summer travel and high fares. The company reported that travel on European roads was particularly strong.
The company was upbeat about the results, despite a drag from higher fuel costs this year, and indicated it expects to meet its 2024 targets of adjusted EPS of $7 and $4 billion in free cash flow. We should note that, while DAL is down roughly 17% year-to-date, the stock has gained 13% since its third-quarter earnings release.
Morgan Stanley’s Ravi Shanker is upbeat about Delta’s prospects after the company’s recent Analyst Day. He writes, “We remain bullish on Airlines until 2023 as we see a ‘Goldilocks’ scenario with DAL being our new top pick for 2023…. DAL 2023 and ’24 guidance came in well above consensus, which adds more momentum to the Airlines bull case for 2023, but more importantly mgmt. compromised the claim that tailwinds are structural rather than transitory, resulting in higher LT earnings power.”
Consistent with these comments, Shanker rates DAL as Overweight (Buy) and gives the stock a one-year price target of $65, implying a strong upside potential of 96%. (To see Shanker’s track record, Click here.)
This blue-chip airline stock has received 13 recent analyst reviews, including 12 buys versus just 1 hold, for a consensus rating of Strong Buy. The stock is priced at $33.16 and has an average price target of $47.85, suggesting a one-year upside of 44% going forward. (See Delta stock forecast on TipRanks.)
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Hyatt Hotels Corporation (H)
Next is Hyatt Hotels, a Chicago-based giant of the hotel and resort sector. The company counts more than 1,200 hotels in its portfolio and includes well-known brands such as Park Hyatt, Grand Hyatt and Hyatt Regency.
The hotel industry was hit hard by COVID in 2020 – but Hyatt’s quarterly earnings have rebounded strongly since the early spring of that year, and the company has posted 9 consecutive quarters of trailing earnings gains. The top line in the latest 3Q22 report came in at $1.54 billion, up 80% year over year, beating the Street forecast by 3%.
At the same time, adjusted diluted EPS fell from $2.31 to $0.64. While the EPS number was down sharply, it beat expectations, coming in at more than double the forecast of 26 cents.
Hyatt has returned capital to investors this year through a share repurchase program and in the first 10 months of the year bought back $290 million worth of common stock. During the third quarter, the company’s purchases totaled $162 million, or 1.87 million shares. Hyatt has approximately $638 million remaining in its current purchase authorization.
Morgan Stanley’s Stephen Grambling calls Hyatt a “Top Pick” and notes several factors that should appeal to investors: “Hyatt is well-positioned to benefit from FCF growth as the company transitions to a lighter operating model assets.Hyatt continues to sell its owned and leased properties, which we view as favorable due to reduced overall business cyclicality and lower capital intensity…Hyatt has the largest exposure within coverage our to group travel (27%), which is still trending below pre-Covid levels… We see Hyatt benefiting the most as business travel continues to recover.”
Going forward, Grambling uses its comments to support an Overweight (Buy) rating, and its $136 price target indicates a potential 49% upside for the stock. (To see Grambling’s track record, Click here.)
9 analysts have covered Hyatt’s prospects in the last 3 months, and these split 7 to 2 in favor of Buy over Hold, for a consensus rating of Strong Buy. Average upside potential stands at 19%, based on a trading price of $91.09 and an average price target of $108.5. (See Hyatt stock forecast at TipRanks.)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your due diligence before making any investment.
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