Investors have had little to feast on in 2022, with all the main indexes likely to see out the year in the red. With 2023 about to kick off, uncertainty rules; many financial prognosticators are predicting a recession next year, either of the mild kind or one that will last a while.
But as usual, there are bright spots for investors to focus on, and the analysts at Morgan Stanley are quick to point them out. Ravi Shanker, an expert on the travel and leisure industry, in a recent note pointed out 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 the US Airlines when market conditions are ‘just right.’ The last three years have seen extreme conditions - 2020 and 2021 were ‘too cold’ due to the lingering pandemic and 2022 was ‘too hot’ with pent up demand and inflation.”
We can take advantage of Morgan Stanley’s travel and leisure stock stance 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 Buy rating with sound upside for the coming year. Here are their details, from the TipRanks database, along with comments from the Morgan Stanley analysts.
First up, Delta Airlines, is a long-time blue-chip stock and one of the industry’s major legacy carriers. Operating from its primary hub in Atlanta, Georgia, Delta boasts approximately 4,000 daily flights to more than 275 destinations world-wide, including over 500 weekly flights to Europe. With a market cap exceeding $21 billion, and approximately $29 billion in annual revenues, the company possesses deep financial resources.
That was clear from the 3Q22 quarterly results. Delta reported a second consecutive quarter of profits, with adjusted EPS of $1.51 coming in well above both the $1.44 from Q2 and the $0.30 from the year-ago quarter – although we should note that the 3Q22 bottom line just missed the $1.53 forecast.
At the top line, revenue hit $13.97 billion, and the company saw an operating cash flow of 869 million. These solid results were driven by a combination of a surge in summer travel and high fares. The company reported that travel on the European routes was particularly strong.
The company was upbeat about the results, despite a drag from higher fuel costs this year, and indicated that it expects to meet its goals for 2024 of $7 adjusted EPS and $4 billion in free cash flow. We should note that, while DAL is down approximately 17% for the year-to-date, the stock has gained 13% since the Q3 earnings release.
Morgan Stanley’s Ravi Shanker is upbeat regarding Delta’s prospects following the company’s recent Analyst Day. He writes, “We remain bullish on Airlines into 2023 as we see a ‘Goldilocks’ scenario with DAL being our new Top Pick for2023…. DAL’s 2023 and ’24 guides came in well above consensus which gives more momentum to the Airlines bull case for 2023 but more importantly mgmt. staked the claim for tailwinds being structural rather than transitory resulting in higher LT earnings power.”
In line 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 watch Shanker’s track record, click here.)
This blue-chip airline stock has picked up 13 recent analyst reviews, including 12 Buys against just 1 Hold, for a Strong Buy consensus rating. The shares are priced at $33.16 and have an average price target of $47.85, suggesting a one-year gain of 44% lying ahead. (See Delta’s stock forecast at TipRanks.)
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Next up 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 pummeled hard by COVID in 2020 – but Hyatt’s quarterly revenues have been rebounding strongly since troughing in the spring of that year, and the company has posted 9 consecutive quarters of sequential revenue gains. The top line in the recent 3Q22 report hit $1.54 billion, up 80% year-over-year, beating the Street’s 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 did beat expectations, coming in more than double the 26-cent forecast.
Hyatt has been returning 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 Q3, the company’s buybacks totaled $162 million, or 1.87 million shares. Hyatt has some $638 million remaining in its current buyback authorization.
Morgan Stanley’s Stephen Grambling calls Hyatt a “Top Pick” and notes several factors that should attract investors: “Hyatt is well-positioned to benefit from increasing FCF as the company moves to a more asset-light model. Hyatt continues to sell its owned and leased properties, which we view as favorable due to it reducing the overall business cyclicality and lowering capital intensity... Hyatt has the greatest exposure within our coverage to group travel (27%), which is still trending below pre-COVID levels… We see Hyatt to benefit the most as business travel continues to recover.”
Heading forward, Grambling uses his comments to back up an Overweight (Buy) rating, and his $136 price target indicates a potential share gain of 49%. (To watch Grambling’s track record, click here.)
9 analysts have reviewed Hyatt’s prospects over the past 3 months, and these break down 7 to 2 in favor of Buy over Hold, for a Strong Buy consensus rating. The average upside potential stands at 19%, based on a trading price of $91.09 and an average price target of $108.5. (See Hyatt’s 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 own analysis before making any investment.
