Positive potential implications: Gaylord Entertainment (GET18 *), Starwood Hotels (HOT34 *), Marriott International (MAR28 *), Wyndham Worldwide (WYN20 *), Choice Hotels (CHH33 **), Orient-Express Hotels (OEH9 **), Royal Caribbean Cruises (RCL24 *****), Carnival Corp. (CCL33 ***), Carnival plc (CUK35 ***), Wynn Resorts (WYNN69 ***), Boyd Gaming (BYD10 ***), Las Vegas Sands (LVS18 ***), MGM Mirage (MGM11 ***), Isle of Capri Casinos (ISLE9 ***), and Melco Crown Entertainment (MPEL5 ***). Mutual Funds: Jones-Villalta Opportunity Fund (JVOFX), Rydex Leisure Fund (RYLSX), Fidelity Select Leisure Portfolio (FDLSX); MassMutual Select Focused Value Fund (MFVAX) and Monetta Fund (MONTX). ETFs: SPDR Dow Jones Mid Cap Growth ETF (EMG)

At least one investor is now anticipating a rebound for beleaguered leisure stocks.

S&P Equity Research projects that growth for casinos, hotels, resorts, and cruise lines may be hampered for the next two or three years as the global economy tries to recover. But opportunities are to be found among companies that are currently seeing high vacancy rates and lower revenues, says Thomas Villalta who is both the chief investment officer at Jones-Villalta Asset Management and co-manager of the Jones-Villalta Opportunity Fund (JVOFX 15 **).

He believes leisure-based industries are unlikely to improve until about 2012, but he doesn't think we need to see a full fundamental recovery to see prices of casino, hotel, resort, and cruise line stocks make dramatic moves upward because "much of the concerns are more than fully discounted in their share prices."

Villalta sees long-term opportunities among some consumer discretionary names with attractive valuations and disproportionately high investor skepticism. "People are trying to rationalize the current downturn in travel. However, the tendency is to not only justify current conditions but extrapolate this view far into the future. When you approach 2012 or 2013, you will see people still love to travel."

He points to some encouraging signs. "You're starting to see some light at the end of the tunnel in places where unemployment and foreclosures were high, like in California. As we move out longer term to 2012, so long as the improvement trend continues, consumers should feel better about themselves and that should bode well for leisure destinations, such as Vegas," he adds.

Still, the industry's current challenges appear daunting. U.S. hotel occupancy was approximately 58% during October, down 7% from October 2008, according to Smith Travel Research. S&P Equity Research has maintained for most of 2009 that U.S. hotel industry fundamentals are likely to remain weak far longer than most investors expect, with a full recovery unlikely until at least 2012.

S&P Equity Research also has a negative 12-month fundamental outlook for the hotels and resorts sub-industry. It maintains strong sell opinions on Gaylord Entertainment (GET17 *), Starwood Hotels (HOT33 *), Marriott International (MAR27 *), and Wyndham Worldwide (WYN19 *), and sell opinions on Choice Hotels (CHH32 **) and Orient-Express Hotels (OEH9 **). "Overall, we believe industry fundamentals on a global basis should remain weak by historical standards for at least two to three years," states S&P's sub-industry outlook.

S&P also maintains a negative 12-month fundamental outlook on the casinos and gaming sub-industry. "Based on a difficult consumer spending environment, higher discounting, airline-capacity cutbacks, and sluggish convention business, we think the gaming industry will continue to be challenged through 2010," Esther Kwon, an S&P Equity Analyst, writes in her sub-industry outlook.

Much of the recent data on tourism and travel to the U.S. confirm that the group is struggling. According to the latest figures released by the U.S. Department of Commerce, international visitor spending in the U.S. was down more than 21% for August year over year.

Despite the reported drop in spending, other data suggest that the tourism climate is improving. According to the latest edition of the United Nations World Tourism Organisation (UNWTO) World Tourism Barometer, worldwide, international tourist arrivals declined 7% between January and August 2009, but the rate of decline has eased. For 2010, UNWTO expects moderate growth.

S&P Equity Analyst Preeti Rambhiya has a positive bias on the cruise-line operators, as reflected in the strong buy recommendation on Royal Caribbean Cruises (RCL23 *****). S&P maintains hold opinions on Royal's rival, Carnival Corp. (CCL32 ***) and Carnival plc (CUK33 ***), which together form the world's largest cruise ship business.

According to Rambhiya, valuations appear attractive, particularly for Royal Caribbean, and earnings are at cyclical lows. The high operating and financial leverage, which has been a drag on the group going into the downturn, is likely to be especially beneficial as things stabilize, in S&P Equity Research's view.

"We anticipate a bottoming out and upturn in pricing for the cruise industry over the next few quarters," says Rambhiya. "A continued improvement in the yield outlook as well as imminent recovery in onboard spending is likely to support top-line evolution in 2010."

Among casino and gaming stocks, S&P would also still not advise adding to positions of Wynn Resorts (WYNN64 ***), Boyd Gaming (BYD9 ***), Las Vegas Sands (LVS17 ***), or MGM Mirage (MGM11 ***).

But Kwon says she's encouraged that Las Vegas visitor arrivals rose 4.3% in September, reversing the downward trend seen in previous months. "On very aggressive discounting, occupancies have returned to the 80%+ level...we think Vegas now offers compelling deals for both corporations and individuals," she contends.

Earlier this month, MGM management spoke to analysts and investors about the improving trends, including better convention bookings, expanding lead times, and fewer cancellations.

Fund manager Villalta owns shares of Royal Caribbean and MGM in his JVOFX fund. "As the consumer feels more certain about the future, we think they will gravitate towards good value vacation options such as Royal and MGM, which probably present the best value for consumers today... For us, it's a valuation story. Although I don't expect MGM or Royal will do spectacularly well over the next six months, I do think that as we see unemployment peak, these companies will disproportionately be affected positively by improvements in the economy."

Kwon also maintains hold opinions on small-cap developer, owner, and operator of branded gaming facilities Isle of Capri Casinos (ISLE9 ***), as well as operator and developer of casino gaming and entertainment resort facilities in Macau Melco Crown Entertainment (MPEL5 ***).

"We think gaming fundamentals are largely likely to remain lackluster, but we see pockets of strength, particularly in Macau, which in 2006, surpassed Las Vegas as the largest casino market in the world," she says, adding that several of the companies in her coverage universe derive more than 50% of their cash flow from Macau, China's offshore gambling destination.

"While earlier in the year we projected Macau gaming revenues would be down, we think they are likely to be up for all of 2009 and accelerate in 2010 and continue to grow through 2012," she contends.

The mutual funds mentioned in the implications box hold at least two of the stocks mentioned in this article, as of the most recent data provided to S&P Equity Research.

---ISABELLE SENDER, S&P Editorial

18-Nov-2009 12:00:25 (14815775)   Copyright 2009 The McGraw-Hill Companies, Inc, Standard & Poor's, a division of The McGraw-Hill Companies, Inc., and their affiliates (collectively, "S&P"). Reproduction of this content in any form is prohibited except with the prior written permission of S&P.