Over the past six months, Travel + Leisure’s stock price fell to $66.37. Shareholders have lost 11.4% of their capital, which is disappointing considering the S&P 500 has climbed by 11.7%. This might have investors contemplating their next move.
Is now the time to buy Travel + Leisure, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Travel + Leisure Will Underperform?
Even with the cheaper entry price, we’re cautious about Travel + Leisure. Here are three reasons why there are better opportunities than TNL, plus one stock we’d rather own.
1. Weak Growth in Tours Conducted Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like Travel + Leisure, our preferred volume metric is tours conducted). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Travel + Leisure’s tours conducted came in at 200,000 in the latest quarter, and over the last two years, averaged 2.5% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Unfortunately, Travel + Leisure’s ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Travel + Leisure’s $7.74 billion of debt exceeds the $282 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $1.03 billion over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Travel + Leisure could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Travel + Leisure can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We see the value of companies helping consumers, but in the case of Travel + Leisure, we’re out. After the recent drawdown, the stock trades at 8× forward P/E (or $66.37 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks We Would Buy Instead of Travel + Leisure
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