The holiday and transport sectors have been on a wild ride over the past few years. But with summer upon us, and the post-pandemic recovery in full swing, now could be the time to look at the sector.
Here, are three promising travel share ideas.
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easyJet
You’d be hard-pressed to find a business model more aligned with holiday trends than an airline. And for easyJet, it’s been a turbulent time.
Post-pandemic travel demand has been a welcome tailwind, but recent comments on the near-term outlook for bookings and revenue per seat were a little soft. A leadership change, with the chief executive officer stepping down and the chief financial officer taking over, has also created some uncertainty.
Even with challenges, the demand for holidays is strong, and economic conditions are improving.
EasyJet also has some specific strengths. It excels at selling extras like baggage and onboard food, which, while unpopular with passengers, is very profitable.
Unlike some of its low-cost peers, easyJet focuses on western European routes from major airports. It costs more to run those routes, but means it can capture demand that peers simply don’t have access to.
To hit the forward yield of 3.3% that analysts expect, the dividend does need to improve over the coming year. EasyJet certainly has the firepower to deliver that, but, as always, no dividend is ever guaranteed and yields are variable.
We think easyJet is well-positioned in its sector and offers growth opportunities that aren’t baked into the current valuation. The leadership change and softer booking outlook pose short-term risks though.
An independent Non-Executive director of Hargreaves Lansdown plc is also an Independent Non-Executive Director of easyJet plc.
Rolls Royce Holdings
Rolls Royce Holdings is a leading player in the aerospace and defence sector. It’s a left-field choice, but products range from engines for commercial jets and fighter planes to submarine propulsion systems and nuclear reactors.
A big portion of its revenue comes from servicing the plane engines it sells. It’s essential that planes stay in the air as long as possible, and demand for overseas holidays and travel is key to that.
Shares have been on an impressive flight path over the past year or so. Engine flying hours (how long planes are in the air) recovered to pre-pandemic levels earlier in the year, and growth is expected to continue.
Disposals and a huge restructuring effort have lightened the load of recent financial scars. Free cash is back, flowing through the business, and analysts expect the dividend to return this year. Of course, this isn’t guaranteed.
The other attraction is the high barriers to entry. There aren’t many large-scale competitors, and the multi-billion-pound order book gives great visibility over future revenues.
Mid-term targets look achievable, with scope for some positive surprises. But the group needs to grow into its above-average valuation, which adds pressure to keep delivering.
Trainline
Trainline is a digital platform simplifying rail and coach travel booking. It gathers routes from different operators, making travel planning easy. This setup lets Trainline enjoy the high margins, typical of software companies, without the hassle of actually running trains.
Trainline's growth depends on increasing online ticket bookings and international expansion.
Currently, just under half of train tickets are booked online, leaving plenty of room for growth. Features like Splitsave, which offers better rates by bundling journeys, are designed to boost digital engagement.
The second growth area lies overseas.
Net ticket sales in Europe pushed past £1bn last year, with Spain and Italy seeing combined growth of 43%. The international market is four times bigger than the UK market. Although Trainline only has a 10% share of total sales in Europe, it’s already the biggest third-party booking platform.
While expansion needs investment, potentially straining short-term cash flow, the long-term value on offer is attractive. Execution risk is the key thing to watch for here – investment needs to drive growth, or the shares will be punished.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Investments rise and fall in value so investors could make a loss.
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