⛱️ Summer Travel Stocks (Hint: Look Abroad)

Happy Sunday to everyone on The Street.

This is a personal opinion, but I can't stand the debates, and subsequent media coverage, surrounding the debt ceiling. From a high level, I understand the significance of reaching an agreement, but it feels like we're continuously kicking the can down the road, and nothing ever really gets fixed. Then, like clockwork, we see the same headlines crop back up again every political cycle: "Currently, lawmakers are at an impasse on these negotiations, raising the risk of the US defaulting on its debts." Just figure it out already and quit talking about it. We have many more important issues to worry about.

In the meantime, maybe there's a way we can trade this debt debacle. For starters, 1-month Treasury bills have jumped well above 5% so maybe that's a place to start looking. If we inch closer to the "X-Date" (such a dumb DC term) and we don't see any movement, well then it might be worth looking at companies with high exposure to the US government. General Electric, Boeing, and Pfizer (classic) are three names with direct government revenue exposure that could see their shares drop if the chances of a default increase, according to US equity strategist Scott Chronert. According to him, put options could be an interesting play. For now, we'll just have to wait and see what happens. I'm fairly optimistic that a deal will be reached, but then again, you really never know.

— Brooks

Review

US stocks finished lower Friday after a mixed day of earnings and news of a debt ceiling meeting’s postponement. While the exact debt ceiling deadline is unknown, Treasury Secretary Janet Yellen has suggested the US government could run out of cash by June 1.

On the earnings front, JD.com reported revenue above expectations at $35 billion along with a net profit of $945 million compared to the $431 million loss in the same period a year prior. The Chinese ecommerce giant also announced new leadership as its current CEO transitions to chairman of the company’s advisory council.

Meanwhile, Wall Street Journal's parent company News Corp reported a 1.8% decline in revenue to $2.45 billion while net profit declined 39% to $50 million or $0.09 per share. The disappointing numbers were largely attributed to lower ad spend from technology and financial companies. News Corp also expressed its concern over the impact of artificial intelligence on its intellectual property, as well as the future of journalism.

On the economic front, the Michigan Consumer Sentiment Index fell sharply from 63.5 to 57.7 in May, well below forecasts of 63. This latest reading highlights a renewed concern consumers have about the economy, partially influenced by the ongoing debt ceiling standoff in Washington.

In company-specific news, Elon Musk announced he is stepping away from his CEO position at Twitter. Linda Yaccarino, former ad chief for NBCUniversal, has been announced as the new CEO and will take his place in late June as he transitions to executive chair and CTO, where he will oversee product, software, and system operations.

Meanwhile, Wells Fargo downgraded Fox Corporation, citing the increasing “cord-cutting” trend and the growing cost of sports rights. Considering Fox is one of the most exposed names to the decline of cable, as well as the 7 to 8% growth in sports rights costs, the bank believes the company will have to compound at least 15% a year just to stay earnings neutral.

In total for the week, the Dow Jones Industrial Average finished 1.11% lower, while the S&P 500 lost 0.29%. The Nasdaq Composite, however, was up 0.40%.

Preview

Tomorrow, the week will kick off with a series of speeches from Fed officials, including Federal Reserve Bank of Atlanta President Raphael Bostic, Federal Reserve Bank of Richmond CEO Thomas Barkin, and Federal Reserve Governor Lisa Cook. Wall Street will listen closely to their comments for hints of the rate hike policy pause anticipated in June.

Tuesday, a flurry of business reports will be released, including retail sales, industrial production, and business inventories. Notably, industrial production increased just 0.5% annually in March, the lowest increase in two years.

On Wednesday, investors will receive plenty of housing data, including building permits and housing starts. After surging 7.3% in February, housing starts decreased 0.8% in March on a month-over-month basis. Additionally, investors will get an update to the 30-year fixed mortgage rate, which currently sits at 6.48%.

On Thursday, an update on the number of jobless claims will be released. For the week ended May 6, 264,000 Americans filed for unemployment benefits, the highest since October 2021. Additionally, investors will get an update on the number of existing home sales in the US during April. In March, existing home sales dipped 2.4% from February.

Earnings Spotlight

Tomorrow, United Insurance (UIHC) will kick off the earnings week. Investors will hope the insurance provider addresses the ongoing-concern warning it issued in April, leading shares to plummet by almost 50%. Fittingly for a Monday, Monday.com (MNDY) will also report.

Tuesday, the nation’s largest DIY home improvement store, Home Depot (HD), will give investors an update on its business. The construction chain’s revenue has been on the decline for the past two quarters. Investors will look to see if this is becoming a long-term trend.

The second-half of the week will be dominated by retail reports, with Target (TGT) and TJX Companies (TJX) setting the tone on Wednesday. As two of America’s favorite shopping centers, these stores will offer a close look at how American consumers are spending.

On Thursday, two of the world’s biggest companies, Walmart (WMT) and Alibaba (BABA), will report on their respective businesses. The latter will give investors a better understanding of spending habits overseas.

On Friday, Deere & Company (DE) will round out the week. The agricultural manufacturer, doing business as John Deere for close to two centuries, may address the manufacturing defect causing a number of tractors owned by the New Jersey State Government to catch fire in recent weeks. Or it might simply tout its latest branded LEGO set.

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Carrier Plays Catch-Up With Trane

Carrier’s HVAC Pure Play Bet

Carrier Global’s (CARR) days of playing second fiddle to Wall Street darling Trane Technologies (TT) may be over. Taking a page from its rival, the heating and cooling company is beefing up with its $13.2 billion buy of Viessmann Climate Solutions, a German maker of heat pumps and climate control products. Meanwhile, the company is largely exiting the refrigeration, fire, and security businesses. When all is said and done it will look more like Trane, which has been able to outperform it in recent years.

Investors seem to prefer Trane because its pure-play nature gives it an edge. For the past three years, Trane’s earnings are up 28.5%. That compares to 19.4% at Carrier. Trane’s stock has returned roughly 28% in the past 12 months. Carrier’s stock is up just about 6%, including reinvested dividends.

Recent Buy Tanks Stock

Interestingly enough, Carrier’s recent acquisition of Viessmann Climate was somewhat controversial. Shares tanked when the deal was announced even though it should drive sales growth to about 5% on an annual basis from 4% and boost profit margins by one or two percentage points. Investors were not happy that Carrier is forecasting less money on a per-share basis next year because of the transaction.

It's something RBC analyst Deane Dray isn’t too worried about. The analyst said the deal will reduce earnings by about five cents per share, or about 2%, due to the increased share count. But it better positions the company. “Overall, we are fans of Carrier’s decision to transition to an HVAC pure-play with an attractive energy transition turbocharger,” the analyst wrote in a research report.

That energy transition turbocharger the analyst is referring to is heat pumps. They are similar to air conditioners but better because they can pump out both hot and cold air, running off of electricity. They tend to be more efficient and will play a big role in reducing carbon dioxide emissions.

According to one estimate, replacing HVAC systems in all US single family homes would cut as much emissions as putting 60 million electric cars on the road. “This looks like an attractive deal, especially in how it accelerates Carrier’s pure-play HVAC transformation,” wrote Dray.

It's All in the Execution

Ultimately, how successful the deal is boils down to execution on the part of Carrier’s management team. CEO David Gitlin and CFO Patrick Goris will be tasked with not only integrating Viessmann but managing the new debt. If they can pull it off, Carrier should have over $22 billion in annual revenue, around $3.7 billion in EBITDA and $13 billion in debt. If it achieves free cash flow of $4 billion by 2025 its balance sheet should look more like Trane’s. Dray has a $48 price target on Carrier and rates the stock an outperform. On Friday shares closed at $42.40.

Carrier is transforming into a pure play HVAC company and is trying to close the gap with its biggest rival. Now it has to convince investors it's worthy of the same love.

Summer Travel With An International Bent

Travel Stocks that Operate Overseas Poised to Win

Summer vacation season is heating up with demand for international travel booming. That is driving up the prices for hotels and airfare, which will be a boon for travel stocks with an international bent.

As it stands, a round-trip flight to Europe costs on average 24% more than the same time frame in 2019. Meanwhile, airfare to Asia is up more than 60% from prepandemic prices. “International travelers are in for some sticker shock this year. High demand and lower supply on international routes are driving airfare to the highest levels in at least five years,” Hopper’s lead economist Hayley Berg told Barron’s.

Even so, it isn’t stopping them from splurging, presenting a potential opportunity for investors.

United, Whitebread, Marriott Big Beneficiaries?

Take airlines for starters. Of the U.S.-based airlines, United (UAL) appears poised to benefit the most. When it reported first-quarter earnings the airline operator said it was expanding its capacity outside the U.S. by 25% to meet demand. For the quarter, United saw a 15% increase in bookings from international travel.

Despite that, Wall Street isn’t convinced United will meet its full-year earnings guidance. They worry the economy will slow in the U.S. and domestic travel will suffer as a result. If United experiences a strong summer, it could prompt analysts to raise their estimates which should drive the stock higher.

“United is best positioned to benefit from strength in international demand,” wrote Melius Research analyst Conor Cunningham in a recent research report. The analyst has a buy rating and $58 price target on the stock.

On the hotel side of the itinerary, analysts point to U.K. hotel group Whitebread (WTB) as one beneficiary of pent-up international travel demand. After all London, according to a AAA survey, is the most popular overseas destination for travelers from the U.S. Bookings in the city are up nearly 350%.

Marriott International (MAR) is another one to watch as more people travel to China and other parts of Asia again. In the first quarter, revenue increased by 34% largely because of the lifting of travel restrictions throughout Asia, particularly in China. Citing a faster-than-expected recovery in international markets, Marriott raised its full-year 2023 RevPAR guidance.

Does Expedia’s Stock Have More Runway?

Then there are travel websites that act as the middlemen for travelers and the industry. Both Booking (BKNG) and Expedia (EXPE) have had strong results in the most recent quarter. Booking posted quarterly revenue of $3.8 billion and gross bookings that were up 44% year-over-year. It marked a quarterly record.

Expedia had record first-quarter revenue of $2.67 billion with total gross bookings increasing 20%. With Booking’s stock already elevated, Expedia may be the better bet. Some analysts think the stock has more room to grow even in the face of tougher comparables in the coming quarters. Wall Street is optimistic. They have a $126.24 price target on Expedia which implies upside.

The U.S. economy may be slowing but that isn’t stopping people from traveling, especially overseas. Travel companies with an international bent may stand to benefit the most from all this summer vacation demand.

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Morgan Stanley Gives These Education Stocks and A+

Technology to Drive Education Sector Growth

Thanks to technology, education is a global business, breaking down barriers and reaching students in far-flung corners of the world. It's also booming with the sector poised to hit $8 trillion by 2030, according to Morgan Stanley. In 2022, the education market was valued at $6 trillion. It doesn't hurt that the sector is in the early stages of consolidation with the ones willing and able to embrace technology likely to benefit.

“For companies that are able to leverage their digital capabilities and balance sheets, technology allows them to break physical barriers, democratize learning, and grow faster,” Morgan Stanley wrote in a recent research report. “It also drives increased profitability through cost dilution, thus leading to a greater ability to reinvest in growth.”

Morgan Stanley sees technology and the undervalued nature of education stocks as two reasons why investors may want to add some to their portfolios including Coursera (COUR), 3P Learning (ASX: 3PL), Arco Platform (ARCE), and YDUQS (BVMF: YDUQ3).

Coursera and 3P Learning Make the Cut

Coursera is a top pick for Morgan Stanley because it is focused on providing universal access to education across the globe to help people hone existing skills and get new ones. Morgan Stanley also thinks the stock is a good way to play the general need for continuing education. It doesn’t hurt that the company has improved operational efficiencies and provides affordable access to learning. The Wall Street firm has a $17 price target on the stock which implies the potential for robust upside.

3P Learning is another Morgan Staley pick. The bank likes the Australian education firm because it has a broad audience of users including schools, teachers, parents and individuals. Its software caters to learners from kindergarten through their teens.

“We like that the digital learning opportunity is currently available worldwide and that most programs offer users an engaging, meaningful, and personal learning experience,” Morgan Stanley wrote. Morgan Stanley gave the stock a 1.60 Australian dollars ($1.07) price target with implies a +30% upside.

Brazil on the Blackboard

Brazil-based education company Arco Platform made the list largely because it is a leader in the K-12 learning systems in Brazil. It is gaining market share and has a presence throughout the country. Morgan Stanley expects the company to grow at a compound annual growth rate of 26% until 2025. That’s enough for the Wall Street firm to give Arco a $17 price target on the stock, which implies a +40% upside.

Then there is YDUQS, also of Brazil. The company made a name for itself providing affordable access to education to lower-income consumers. Morgan Stanley also likes the stock because the company is well run, is exposed to campuses, distant learnings, and medical schools, and survived the pandemic relatively unscathed. The bank has a 13.50 Brazilian Real ($2.70) price target on YDUQS, implying a +50% upside.

Technology is transforming the way we learn and these stocks are at the forefront of the shift. The unanswered question is will it transform the portfolio of investors who raise their hands for these companies?

Last Week's Poll Results

Are you bullish or bearish on KVUE over the next 24 months?

🟩🟩🟩🟩🟩🟩 🐂 Bullish

🟨⬜️⬜️⬜️⬜️⬜️ 🐻 Bearish

Which stock will outperform over the next 12 months?

🟩🟩🟩🟩🟩🟩 Capital One (COF)

🟨🟨🟨🟨⬜️⬜️ American Express (AXP)

⬜️⬜️⬜️⬜️⬜️⬜️ Citigroup (C)

Are you bullish or bearish on Eli Lilly (LLY) over the next 12 months?

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🟨⬜️⬜️⬜️⬜️⬜️ 🐻 Bearish

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