The significant falls in the oil price over the past 18 months have thrown up unprecedented opportunities within the travel and leisure industry, according to Steve Davies, who runs through four stocks he has been buying in the sector for his Jupiter UK Growth fund over recent months.
According to FE Analytics, the S&P GSCI Brent Crude Spot index is down a hefty 52 per cent since January 2014 and investors will know it has had a multitude of knock on effects for the global financial system – ranging from the creation of deflation in parts of the world to the vulnerability of some of the UK’s largest companies’ dividends.
Performance of index since Jan 2014
Source: FE Analytics
While an oil price of $48 a barrel clearly has negative impacts on certain parts of the market, Davies says it has made certain stocks within the FTSE All Share incredibly attractive. 
“I am no oil forecasting guru, but it seems likely to me, given the current supply glut and the rapid productivity improvements being made by the US shale industry, that the oil price could be stuck below $60-65 for some years to come,” Davies (pictured) said.
“Although it is now more than a year since the oil price started to collapse, the hedging programmes of airlines and travel companies take some time to unwind so we are just starting to see the benefits of lower fuel prices coming through.”
Davies has managed the £1.6bn Jupiter UK Growth fund since January 2013 over which time it has been a top quartile performer in the IA UK All Companies sector and has more than doubled the returns of the FTSE All Share with returns of 50.26 per cent.
In this article, he highlights four leisure orientated stocks which he owns in his portfolio and has been buying more of in recent weeks. All told, they account for 13 per cent of his assets and Davies is likely to add more exposure as they are “well placed to benefit from this new golden age of travel”.
Thomas Cook
First and foremost, Davies says the FTSE 250-listed global travel company Thomas Cook will be a prime beneficiary.
According to FE Analytics, the stock has rebounded significantly since there were genuine fears over its survival in 2011 (its share price fell 93 per cent in 11 months) thanks to aggressive cost-cutting. Nevertheless, Thomas Cook has still been a relatively poor performer as it is down 18 per cent over two years.
However, the stock is Davies’ seventh largest holding and makes up 4.04 per cent of his fund. He thinks another rebound is on the horizon.
“[Thomas Cook] spent about £900m a year on jet fuel in FY14, paying just under $1,000 per tonne. That figure has dropped to $917 for the year to September 2015, but the really sharp improvement should come in FY16 where they are now almost 90 per cent hedged at $707 per tonne according to their Q3 trading update.”
“With forward prices now well below $600, I estimate that the company could ultimately reduce its fuel bill by as much as 45 per cent by 2017 in dollar terms, albeit the sterling saving will be lower given the stronger dollar.”
“Some of this may get passed on to consumers in the form of lower prices, which should boost demand. Nevertheless, it should provide a significant tailwind for a company whose total profit this year is forecast to be a shade over £300m.”
Along with FE Alpha Manager Stephen Anness’ Invesco Perpetual Global Opportunities, Jupiter UK Growth is one of the five Investment Association funds to count Thomas Cook as a top 10 holding.
IAG
Davies is also bullish on IAG, the FTSE 100-listed multinational airline holding company, which makes up makes up 4.22 per cent of his fund and is therefore his sixth largest holding.
“The maths are similarly exciting for IAG, owner of British Airways, Iberia, Vueling and now Aer Lingus.”
“The company’s latest guidance at its Q2 results in July was for a total fuel bill of €6.0bn for 2015. Given commodity and currency movements since then, my own calculations suggest that the figure for 2016 could be as much as €1bn lower.”
“This is before factoring in the benefits of new and more fuel-efficient aircraft reducing the volume of fuel needed as they come into service.”
According to FE Analytics, IAG is up 108.26 per cent since its first day of trading in January 2011 compared to a 33.26 per cent gain from the FTSE All Share.
Performance of stock versus index since Jan 2011
Source: FE Analytics
Davies is certainly not alone in backing IAG. FE data shows that 24 other funds count it as a top 10 holding including Old Mutual UK Alpha, CF Miton UK Values Opportunities, Invesco Perpetual UK Focus and Standard Life UK Equity Unconstrained.
WH Smith
Davies added: “If some of these fuel savings are passed on to consumers in the form of lower prices, we should expect passenger numbers to go up.”
“WH Smith might not seem the most obvious beneficiary of this, but the reality is that its travel business now accounts for nearly 60 per cent of group trading profit and its airport shops are a very substantial part of this.”
The FTSE 250 retailer has prospered over recent years thanks to an improvement in the UK economy and increasing levels of consumer confidence. The share price has gained a hefty 190 per cent over three years, but Davies (who has £44m in the stock accounting for 2.88 per cent of his assets) thinks the future is very bright for WH Smith due to the lower oil price.
“The first signs of improvement were apparent in WH Smith’s FY15 results last week, with the travel division delivering positive life-for-like (LFL) sales growth for the first time since 2008. Indeed, the momentum has improved through the course of the year, with first half LFL growth of 3 per cent, accelerating to around 6 per cent in the final quarter by my estimates.”
Despite the positive outlook and its stellar gains over recent years, CF Miton UK Value Opportunities is the only fund to count WH Smith as a top 10 holding.
Merlin Entertainments
The final stock on the list is Merlin Entertainments, which Davies thinks is likely to benefit from increased global travel but also from the very rapid growth in Chinese tourism.
“Merlin is one company that should be well placed to benefit from this trend. It already operates a wide range of attractions (such as Madame Tussauds, SeaWorld, Legoland) in the UK, Europe, Australia and North America that could see increases in visitor numbers from China.
“I also see a huge opportunity for the company to develop Legoland theme parks across Asia over the next decade.”
Davies points out that there is a lot going for the company at the moment thanks to the success of The Lego Movie (there are three more in the pipeline) and a number of its extension ranges (such as Ninjago and Friends) are generating huge amounts of popularity.
Merlin’s share price has had a torrid time over recent months due to the well-publicised incident at Alton Towers which led to four serious injuries. All told, the share price is down 16 per cent since the collision.
Performance of stock versus index in 2015
Source: FE Analytics
Nevertheless Davies says investors are wrong to ignore the company.
“I have been tracking Merlin closely ever since it floated in 2013, but it had always been too expensive to get through the strict valuation filters that I apply to all the growth stocks in the fund,” he said.
“Following the recent market pullback, as well as the adverse impact of the recent accident at Alton Towers, that is no longer the case and I have been building up a position over the last few months.”
The only investment association fund to currently hold Merlin in its top 10 is Fidelity UK Growth.
