In this podcast, we take a look at earnings reports from Hilton Worldwide Holdings (HLT -2.74%), Expedia (EXPE -6.02%), and Avis Budget Group (CAR 1.14%).
Motley Fool analyst Asit Sharma discusses:
- Key metrics for hotels, bookings, and car rentals.
- The travel industry’s growth having a positive ripple effect on advertising revenue.
- Why he prefers travel brands with staying power.
Later in the podcast, Motley Fool host Alison Southwick and Motley Fool personal finance expert Robert Brokamp discuss how to adjust your monthly budget after you get a raise.
Here’s the retirement calculator they talk about.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on May 3, 2022.
Chris Hill: [MUSIC] You’re not the only one planning a trip this summer, and the results are starting to show up in travel stocks. Motley Fool Money starts now. [MUSIC] I’m Chris Hill, joined by Motley Fool Senior Analyst Asit Sharma. Thanks for being here.
Asit Sharma: Chris, thank you for having me.
Chris Hill: A question that I find myself asking with greater frequency, and I’m not alone, which gives me some comfort, the question is, where should I be looking? As a stock investor, you can look at categories of stocks. You can also look at industries. Today, the travel industry is front and center in the news, so I thought this is as good an opportunity as any to look at the travel industry. Hilton Hotels, Expedia, Avis Budget, they’re all out with their first quarter earnings reports. I will just add, go ahead and ignore what’s happening with those stocks today. Over the last six months, all three of these stocks have outperformed both the Nasdaq and the S&P 500. So I wanted to spend a couple of minutes on each, get your thoughts, and then talk about the travel industry at large. Let’s start with Hilton Hotels. The profits look good. The full-year guidance was lower than Wall Street wanted, although this is not really the time or the environment for any company to go big with guidance. But in general, this seems like a good quarter for Hilton.
Asit Sharma: Hasn’t Wall Street seen what’s going on in the large world? [laughs] If you’ve got expectations for later this year, best to check those expectations at the door and look what’s happening on the ground here, which I think is pretty positive for Hilton. Chris, they had a profitable quarter. They had net income of 211 million bucks. What I really liked about this report is their systemwide comparable RevPAR, that’s fancy speak for revenue per available room, an average revenue they have broken down by room. That increased by about 81 percent from the prior period last year, which as you remember, was one where Omicron, that variant was all over the news. Traffic in all these travel companies was coming again to a halt, not quite as bad as we had in 2020. But Hilton took a hit. What I loved about their increase in RevPAR is that the two big components, the average daily rate and occupancy, both were strong. So not only are people coming back and traveling both for business and leisure, they’re willing to pay the slightly higher prices that they paid last year, when it was a little easier to get a room, whether you were traveling for business or leisure purpose.
Chris Hill: I’m glad you hit on this. This is something that we saw with Expedia as well because Expedia’s first quarter loss was smaller than expected. The stock, when I checked earlier, was down about 12 percent today. But you look inside Expedia’s report, and you can see in the numbers the demand for travel. People are spending more money. In the case of Expedia, the cost of airfare was up, but the number of tickets sold was also up. Hotel rates on the rise, but hotel stays up more than 50 percent. Again, that’s why I say, forget about what the stocks are doing today, you can look at these three and just see the demand for travel going higher.
Asit Sharma: Chris, I know we’re going to talk a little bit, in general, about investing in this industry, so I don’t want to say too much just now, but Expedia has a pretty nice brand. They’re getting a lift as travel resumes. People are going to their various properties. Hotels.com comes to mind because I’m a cheapskate, and that’s one of the places that I look when I’m going to travel. I’ve been on their site as of late looking at some potential room nights. But this is the thing also we have to keep in mind. Not every company in the travel industry is going to be back to 2019 levels. When we look at the tech industry, often you and I talk, and we see companies that are already exceeding 2019 performance. But here, Expedia, while they are up at 52 percent in their stayed room night growth versus their first quarter of 2021, they’re still lagging 2019 and haven’t quite gotten back to that critical mass of volume that they need among all their various travel properties to be profitable. So this quarter, they had a net loss of 122 million bucks, but they are on the right path. Their gross bookings really jumping up here 24 billion bucks [laughs] in gross bookings versus just 15 billion roughly this time last year, so a positive trend here for Expedia. Not quite there, but again, they’re on the right path despite so many geopolitical events that, past COVID, keep throwing them for a loop. I’m referring, of course, to the word Ukraine.
Chris Hill: Obviously, both of them tied to the hotel industry. You talk about the revenue per room. I always think of it as heads on beds. [laughs] If you’re in the hotel business, that’s what you’re looking for. You will want heads on beds. Avis Budget Group, first quarter profits came in higher than expected. They already had a stock buyback plan in place, and they said, “We’re going to increase that plan by three billion dollars. I can’t say, with any authority, how good they are at that. I will just look at their stock chart and say, if they’re going to buyback shares, they are buying back at a higher price because that’s a stock that’s done well over the last couple of years.
Asit Sharma: Stock has done well. Management obviously thinks that investors will appreciate them putting these excess profits to work, and looking at that stock chart, I think investors do like this and they want more utilization of free cash toward reducing share count here. But they are firing all cylinders because we have to trot out a lame cliche if we’re talking [laughs] about the car industry here. I like that this jump in quarterly revenues of 77 percent was accompanied by some nice profitability on the bottom line. But again, we see a trend here, Chris. They mentioned that their revenue increase was driven by rental days as demand improved and increased revenue per day, so we have this pricing power element going on. Now in the car industry, there is demand for cars. There are fewer new cars, and this has ripple effects everywhere. We’re still dealing with supply chain issues that are causing chip shortages, so the rental car companies are able to utilize this to their advantage. People need to rent more vehicles, and again, we have the tailwind of improved travel, which is pushing this company. I think of the three that we’re talking about today, they’re probably enjoying the best performance.
Chris Hill: Airbnb is going to report after the closing bell today. One of the things I like about Airbnb as a business is they don’t really need to spend a ton of money on marketing. They’ve talked before about how word of mouth is such an important lever for them, and they’re not paying for word of mouth. You look at businesses like the three that we’re talking about today, Expedia, Hilton, Avis Budget, you can go ahead and throw Marriott in there as well. Those are businesses that do depend on marketing and advertising. It occurs to me, as we’re having this conversation, that one of the nice ripple effects of the travel industry bouncing back the way we’re seeing, the demand for travel increasing the way that we’re seeing, is for advertising businesses. This has to be a win for businesses like Alphabet and Facebook who depend on advertising.
Asit Sharma: I think so, and I think this also proves the resiliency of both the advertising model and the travel model. Long-term US economy keeps growing, even at our worst. These are tough times with interest rates so high, inflation is going through the roof. We probably will still manage to eke out some economic growth this year. We’re a consumption-based economy, so over time, as you said at the outset of this conversation, Chris, when investors try to choose where to invest, this is one of those logical places. But I think it takes some nuance.
For me, how I invest in the sector is, I try to think about big brands, powerful brands that have some staying power. If I’m looking for the highest growth vehicles, I’ll probably look outside the travel industry. When I’m investing in this, I’m thinking about these companies. We’ve mentioned several today. I’m an owner of Airbnb, I’m an owner of Marriott, for example. We’re talking about durability, advantages of scale. Hilton has that. They’ve got a pipeline of several 100,000 rooms that are into development. They make a lot of money just franchising their brand name. We could talk about each of these companies as having that staying power. That’s what you want as an investor. Maybe you won’t get the most powerful growth that way, but when you’re building out a portfolio, you can’t all be tech nor can’t be the sleepiest industry, say, utilities industry. This is a good place to look, in that regard.
Chris Hill: I love what you said about brands with staying power because if you think about experiences that people have with travel, whether you’re traveling for pleasure or for business, there is an emotional component to it. Anytime you’re traveling, people will always ask you, “How was the travel,” not “How were things at your destination?” whether it was a vacation, or a business meeting, or a conference, or something like that, but “How was the travel?” How the travel went has an impact on the brand. I think you’re absolutely right that the more people, a business like Marriott, which to my own detriment do not own shares of, the more Marriott can continue to fulfill the brand promise that they are making, whether it’s the business travelers or to people on vacation, the more they’re just going to strengthen that brand, and the more it becomes a brand with staying power.
Asit Sharma: Let’s just keep on Marriott for just a second. They really understand their consumer. They have a wonderful loyalty program, which is helping them actually move business off of sites like Expedia and make it more direct with their customers. They have that relationship. We, as consumers, even if we, in this particular industry, switch to being more Airbnb consumers than Marriott, we will still in certain situations, be it business travel or you just happen to check one of Marriott’s sites and they’ve got from budget to, of course, very upscale properties under their big banner. We might stay at the property here and again. They’ve got that core business that resonates with customers. I think that this is how you want to play this industry. It’s volatile and, at the end of the day, it’s not immune to shocks. It’s prone to exogenous shocks. But overtime, Chris, you and I we got to get out. We have to see the world. [laughs] You and I can’t always be hanging up together on Zoom. [laughs]
Chris Hill: No, we can’t. As much as I enjoy hanging out on Zoom with you, no, we need to get out. [MUSIC] Asit Sharma, love talking to you. Thanks for being here.
Asit Sharma: Always fun. Thanks again, Chris.
Chris Hill: Remember you can email [email protected] with your questions about stocks and money, like Erica did. She wrote, “I recently received a five percent raise. I just turned 30. I’m saving for a house, paying off student loans, paying rent, and of course, saving for retirement using the Motley Fool’s guidance. What recommendations do you have for adjusting your budget with an adjustment in income?” Great question, Erica. With some tips on how to handle a raise, here’s Robert Brokamp and Alison Southwick.
Alison Southwick: Last week we talked about getting a raise, and this week we’ll discuss what you should do if you’re successful, like Erica. Much of what we’ll discuss doesn’t just apply to a bigger paycheck, but any financial windfall you might receive. Getting a raise is great news, but it might actually be even better than you think. Why is that, Bro?
Robert Brokamp: Because it’s actually much more than getting a paycheck. There a few examples why this is the case. We’ll start with one here. You maybe boosting your eventual social security benefit because it’s based on your 35 highest earning years adjusted for wage inflation, so if you get a raise, and it’s among your better earning years, it might knock out one of those lower-earning years. This is similar to other benefits you receive like a pension or employer-provided life and disability insurance. Many of these are based on your annual income, so the more you earn, the more valuable that benefit. It could also result in a higher employer 401k match, if you get one, since most match formulas are based on a percentage of your income. Depending on your plan, this may be true even if you personally don’t contribute more to your 401k, though you should. We’ll get to that later. All kinds of good things come with getting a raise.
Alison Southwick: You know who is also happy to hear you received a raise? Your dear uncle Sam. He misses you.
Robert Brokamp: Here is the less good news of getting a raise. You have to share your raise with Uncle Sam in the form of higher taxes, same with sister state, if you live in a state that charges income taxes. Tax season just ended, so really, we should all think about whether we’re having too much or too little withheld from our paychecks. You want to make changes now so you don’t owe too much next April or get a huge refund, which I know feels good, but we probably could have done better things with our money than give the government an interest-free loan. By the way, April just ended, so we are already 1/3 through 2022, believe it or not. You have two-thirds of the rest of the year to get your withholdings right. Since higher income means higher taxes, getting a raise is a good time to reevaluate those withholdings.
The IRS does have a tax withholding calculator. Lots of fun. You can find it just by googling it for it, and it’ll help you with the calculations. If you figure out that you should have more, or less, withheld, you submit a new W-4 to your employer, and they probably can help you with that process. We’re also talking a little bit about windfalls in general, and the tax consequences of those varies on the type of windfall. For example, a bonus does not just get added to your income and tax like the rest of your pay. It’s considered supplemental income and is usually taxed at a flat rate of 22 percent.
That might be more or less than you need to have withheld, so then you compensate with the rest of your pay. Since this has been in the news recently, I’ll add that debt forgiveness, which is a windfall, generally, is taxable. However, that may not be the case for forgiven student loans. So it depends on various factors. A law passed last year makes most forgiven federal education debt tax-free, but only through 2025, so as always, dig into details of your particular situation. I’ll just throw in a final note on taxes here. A higher income could result in you being ineligible for some tax breaks or being ineligible to make some contributions to investment accounts, like a Coverdell education savings account or a Roth IRA. Not the Roth 401k, anyone can contribute to the Roth 401K. But if you make too much money, you can’t contribute to the Roth IRA. If your income was already close to those eligibility thresholds, evaluate whether you can still contribute.
Alison Southwick: You’ve thought about the IRS, and now you’re looking at that money pile that’s leftover. Yes, you can treat yourself. We’ll get to that. But first, hopefully, you’re thinking about the long term.
Robert Brokamp: Ideally, you’ll be able to use some of this newfound money to buy a better future, if you can. As you might expect, we don’t recommend that you blow your extra dough on more stuff. Ideally, you’ll use it to fortify your financial future by saving and investing a portion of that new money. That said, we know that many people are getting raises that are below the rate of inflation, so some folks are going to need really every penny of their after-tax rates just to cover the cost of living. But if that’s not you, then ideally, you’ll be able to use a portion of your raise or windfall to build an emergency fund, payoff higher-interest debt, like credit cards charging 15 percent, or just save more for retirement or college, if you have kids.
Let’s return to Erica, whom we heard from at the beginning of this segment. So she has school loans, wants to buy a house, and is saving for retirement. What should she do with her new raise? At this point, I wouldn’t be in a hurry to pay off school loans. Repayment of federal loans have been paused until August 31st, and there’s all that recent talk of loan forgiveness, again, mostly of federal loans, plus the interest rates on school debt are generally low. Interest is tax-deductible for lower and middle income Americans, and you don’t even have to itemize to take that deduction. So that leaves the house and retirement. So she could set up a higher-yielding online savings account and have money automatically transferred after each paycheck to begin building up a down payment for the house and then use some of her raise to save more for retirement. It’s just really about everyone should. In fact, if you don’t save more for retirement, getting a raise might actually put you farther behind. That’s the conclusion of a report from Morningstar entitled “More Money, More Problems.
How To Keep A Bigger Paycheck From Spoiling Retirement”. According to their research, most people don’t increase their savings rates as their income rises. Instead, they only use it to increase their lifestyle. They go out to eat, they buy nicer cars, they get a bigger house, that type of stuff. As the report put it, yesterday’s indulgences become today’s new normal and tomorrow’s expectations, otherwise known as lifestyle creep. The problem is, the more you increase the cost of your lifestyle, the more you increase the cost of your retirement because most people want to maintain that lifestyle when they quit work. No one wants to have to cut back.
Now you might think, well, I’m saving a percentage of my income. So when my income goes up, my savings will also go up, and I will be just fine. But the Morningstar report found that this may not be the case, and workers should also increase their savings rates, that is, the percentage of income that they’re saving for retirement. The report actually suggested the following guideline: spend twice your years to retirement. So if you’re 20 years from retirement, you can spend 40 percent of your raise, but then save the rest, or just follow the advice of podcast listener Dave G, who emailed us few years back and said that, when he was at college, he was taught to save half of each raise. He did so and that allowed him to gradually build up to a savings rate of over 40 percent by the time he was in his 50s and allowed him to retire early.
But of course, dear listener, your situation is going to be unique because you’re so darn special. So the Morningstar report also suggests that this would be a good time to meet with a financial planner who can help determine how much of your raise you should be saving because, after all, if you’re really behind, you should bank it all. Of course, this also applies if you receive some a windfall. If you’re behind in your retirement savings, receiving an inheritance or something large just falls into your lap, this is a great opportunity to boost your net worth. Unfortunately, according to an Ohio state study, Americans save only about half of their inheritances, and as many as 40 percent of heirs spend the whole thing. So if you receive a large chunk of change, you might also want to spend some time with a financial planner.
That said, she or he won’t work for cheap. So if you’re looking for a good free online retirement calculator, we’ll provide a link to my favorite one in the show notes. I do want to add a special tidbit for those in the military. You actually have access to free financial counseling, and you’ll get a reminder about this benefit at certain touch points in your career, including when you maybe get a promotion and a raise. So be sure to take advantage of that. I want to give a shout out to Daniel Kopp of Wise Stewardship Financial Planning, a fellow in my master’s degree program, who alerted me to this perk. Thank you, Daniel. Then one final financial planning point: a raise is a good time to evaluate your insurance. I know not a very exciting topic, but you get life insurance and disability insurance to replace income you can no longer earn. The more your income grows, the more you should consider whether you should have more insurance. The death benefit of a life insurance policy bought when your kids were born may no longer be enough, 5, 10, or 15 years later. Now it might be because you’ve built up a net worth, and you’re in control. Really, you don’t need as much life insurance as you bought. But getting more insurance is not very expensive. According to policygenius.com, a $250,000 10-year term policy for a healthy 35-year-old male is only about $14 a month. For a $500,000 policy, you’ll pay just another $7 a month on top of that.
Alison Southwick: As much fun as it is to pay more taxes and ponder life and disability insurance, Bro, have we come to the part of your advise where you tell people to treat themselves because I did promise we would get to that part? The immediately fun part and not the thinking you’re past self in the distant future part.
Robert Brokamp: Yes, and I do think this is important, even though we saved it to the end. You should enjoy. [MUSIC] We covered a bunch of responsible boring stuff, but hopefully there’s enough leftover to enjoy some of your raise or your windfall. Got to eat, pop up your vacation budget, replace that five-year-old phone, whatever is a worthwhile reward for you, you earned it. [MUSIC]
Chris Hill: As always, people on the program may have interest in the stocks they talked about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. I’m Chris Hill, thanks for listening. We’ll see you tomorrow.