Travel + Leisure trades at $42.75 per share and has moved almost in lockstep with the market over the last six months. The stock has lost 9.1% while the S&P 500 is down 6.9%. 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? See what our analysts have to say in our full research report, it’s free.
Even though the stock has become cheaper, we're cautious about Travel + Leisure. Here are three reasons why you should be careful with TNL and a stock we'd rather own.
Why Do We Think Travel + Leisure Will Underperform?
Formerly known as Wyndham Destinations, Travel + Leisure (NYSE: TNL) is a global vacation company that provides travelers with vacation ownership, exchange, and travel services.
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 175,000 in the latest quarter, and over the last two years, averaged 13.6% year-on-year growth. This performance slightly lagged the sector and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Travel + Leisure historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7.9%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Travel + Leisure’s $7.75 billion of debt exceeds the $167 million of cash on its balance sheet. Furthermore, its 8× net-debt-to-EBITDA ratio (based on its EBITDA of $930 million 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 cheer for all companies serving everyday consumers, but in the case of Travel + Leisure, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 6.6× forward price-to-earnings (or $42.75 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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