Air
date: December 3, 2004
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Travel companies
GEOFF COLVIN: If you're traveling this holiday season, you understand why the word "travel" is derived from the word "travail." Long lines, bad weather, bankrupt airlines, high gas prices -- you'd never guess that in fact travel is booming, on track to top pre-9/11 levels.
But the way we buy travel is changing, leading a couple of America's sharpest business titans to bet big-time on travel's online future. So what's it all going to mean for investors and travelers, and where do Americans most want to go now?
Paul Keung covers the travel industry for CIBC World Markets. He joins us from New York, as does Daniel Kadlec, who writes for Time magazine.
Paul, so much of what we hear about travel seems to be bad news. Airlines in crisis, gas prices off the charts, inconvenience at airports. How is this travel season actually shaping up, big picture, as a business?
PAUL KEUNG: As a business, the travel season is having a great year. We've had several very difficult years, if you go back to 9/11, the Iraq war, and then the SARS scare that affected a number of the industries. The numbers that we'll see in the back half of this year won't be as robust and as strong as the first half. The comparisons are different.
That being said, you're seeing a significant increase in leisure travel still, you're seeing corporate bonds come back about 5 or 6 points over last year, and you're seeing pricing up in just about every category, with the exception of airlines and car rental, which have their own structural issues.
COLVIN: Dan, the Internet is transforming travel, as it's transforming everything, and a couple of the very best wheeler-dealers in America, Henry Silverman of the Cendant Corporation, and Barry Diller, of IAC, InterActiveCorporation, have decided to place big bets on this. What's going on, and can they both succeed?
DANIEL KADLEC: Well, you know, Geoff, anytime you get two celebrity CEOs in the same market, you know it's going to be interesting, but you also know it's a hot market.
Online travel booking is growing roughly four times the industry, by the estimates I've heard. Something like one in three people will book online this year, which is double a couple of years ago, and that might easily to one in two over the next couple years in the very near term.
COLVIN: People don't know Cendant's name all that well, but they do know the companies that Cendant has in travel. What are they?
KADLEC: Well, Cendant is a big player in travel. They have Avis Rental Car, they have hotels, Travelodge, Ramada Inn, Howard Johnson's. So they're a big player in that area.
COLVIN: But they just got into online travel in a big way, is that right?
KADLEC: Right. I mean just this week, they bought ebookers, which is a very popular British travel site. In September they bought Orbitz, one of the big players in the States. I think they paid something like $1.2 billion for that business.
Only a year ago, it's not clear that Henry Silverman ever thought he'd be making this kind an investment in online travel, but the growth story is just so strong he couldn't ignore it. One in three people will book online this year. That could go to one in two in the next couple of years. It's already doubled over the last couple of years. It's a growth story within a sort of moderately growing industry, and it just can't be ignored.
COLVIN: And of course Barry Diller has been in online travel in a big way for some time. What has he got?
KADLEC: Right. This is Barry's game. He bought Expedia a while ago. He has Hotels.com. He is sitting there waiting to scoop up all the business as people migrate from old travel agencies to online travel. That's his game plan. He's doing it in a lot of areas, in other businesses as well. Travel is his biggest bet.
COLVIN: And you've spoken to them, you've written about them, and these guys maintain that they're not butting heads, right, that they're not competing, there's room for both. Do you buy it?
KADLEC: You know, that's what they say, but these guys know each other, they have lunch together, they're in the same industry and the same circles. Maybe they just want to kind of keep it civil. But you know what? They do say that there's room for both, and in fact they say there's room for even more than the two of them with this kind of growth.
COLVIN: Paul, you track these companies as an analyst. What do you think of IAC, InterActiveCorporation, Diller's company, and Cendant, Henry Silverman's company?
KEUNG: Well, I think they're both the top two players in this space. I think they're very smart investors and smart given their track record, and they realize the opportunity in this sector.
There's really pockets of opportunities. One is you have tremendous secular growth. I mean people are moving and migrating online. Two, you are seeing an overall recovery in travel, and three, structurally there's an opportunity to give consumers more of what they want in making travel, booking travel a lot more convenient and possibly giving them packages and giving them options they couldn't normally have before when they were looking to book their vacations.
COLVIN: Go ahead, Dan.
KADLEC: What Barry Diller told me was that packages are the future of this segment. You know, everybody can get, everybody knows about getting hotels and cars and airline tickets online, but the holy grail is moving to restaurant reservations and theater tickets and booking tours and getting your tee time and getting all of this online on one site, and getting it at a cheaper price than if you booked directly individually.
COLVIN: Well, it sounds like a great advantage and a technological challenge and a business challenge, but what I don't understand, and I'd appreciate both of your views on this, is how does any one company build a sustainable advantage in this area? It sounds to me like it could just devolve into a price war, one against another. Dan, what do you think?
KADLEC: Well, that's clearly the challenge, but, you know, Expedia and Orbitz already have big names out there, very well recognized. You know, a lot of hotels are trying to drive business right to their web sites, and they haven't really been able to do it because of the name recognition of Expedia and Orbitz. But clearly it's a challenge.
COLVIN: Paul, what do you think?
KEUNG: In the U.S., this space has been evolving for five or six years now. And I think what you're really seeing now is sort of the emergence of who are going to be the top players, and in the U.S. right now you really have about four players that control most of the third party bookings, control close to a billion dollars of marketing revenues, and a lion's share of the profitability. The second tier players, the smaller Mom & Pop web sites that tried to go after this space, they're done. Either they got bought out or they've closed their shops…
COLVIN: You said four control it. Who are they?
KEUNG: Outside of Barry Diller and Henry Silverman's portfolios, you also have Travelocity, owned by Sabre, and you also have Priceline, which is still independent, still a pretty legitimate player in North America.
COLVIN: Okay. Here's another angle on the whole thing. We've got a survey showing the places that Americans most want to go. The top five in order are: the Hawaiian neighbor islands, meaning Maui and Kauai and stuff like that; 2) the national parks, like the Grand Canyon and Yellowstone; 3) Honolulu; 4) the Florida Keys and 5) the Florida Gulf Coast. Paul, how has this changed over the years and what does it mean?
KEUNG: There's been a number of dynamics that's sort of highlighted those locations. One is you've had a weaker dollar. Two is you've had the Iraq war and SARS and 9/11, and what that has done is sort of highlighted the opportunity for Americans to travel closer to home.
And another beneficiary has also been the cruise industry, to the extent you can park your car, jump on a cruise ship and go for a week or so without having to go too far from North America. That has enabled a lot of these particular locations you mentioned to really thrive.
That being said, however, with the weaker dollar, we're also seeing some increased international travel of foreigners coming to the U.S. to take vacations, so that could be an added benefit over the next year or two.
COLVIN: Paul, here's another angle, because a lot of people think about their vacation not necessarily as a city or a region, but as the resort or hotel they actually want to go to. You cover those companies. What are the best-run resort and hotel companies?
KEUNG: Some of the best hotel companies, it's the ones that consumers recognize. I think first of all if you look for the strong brands. Look at companies like Marriott, Hilton, Starwood. Marriott has brands like the Ritz-Carlton. Starwood has the Westin and St. Regis brands. Hilton of course has a very strong and worldwide portfolio.
COLVIN: For investors, what's the best place to be as we watch this whole industry evolve? Who's got a sustainable advantage? Who's going to survive and prevail?
KEUNG: It's funny you mentioned earlier Barry Diller and Henry Silverstein's portfolios. We actually have an outperform on both those stocks.
COLVIN: Outperform on both.
KEUNG: Yes, meaning we actually recommend both stocks. What's important about these two companies is they have the great assets right now, they're in a great sector, and very strong management. I think if you look at the landscape right now, there's very few competitors that really match up in terms of the assets and the balance sheets that they have.
COLVIN: Dan, is this all going to make life easier and less expensive and generally better for travelers?
KADLEC: Yeah, I mean I think that's the end game. Again, it comes back to packaging, but also price. As these guys battle it out in this area, they're going to have to make more things available at a better price and more conveniently. Gosh, that's a homerun for consumers. That's what you want, that's what you hope will happen, and that's probably what will happen.
COLVIN: Daniel Kadlec and Paul Keung, thanks so much for your views.
KADLEC: Thank you.
KEUNG: Thanks.
Assisted living
KAREN GIBBS: Well, let's move a little closer to home. Baby boomers are often called the sandwich generation because they are sandwiched in between their children and their parents. Just when we thought we might have college tuition and retirement all planned for, comes yet another challenge -- caring for aging parents. More than 30 million Americans are caring for an elderly parent, and helping with that challenge has become big business, one that Wall Street is certainly taking notice of.
We asked contributor Michael Farr to take us inside that industry.
Michael.
MICHAEL FARR: Karen, this increasing portion of the population presents a business opportunity. The real question is how do you sell these services? How do you provide these services? So we went to Sunrise Assisted Living to figure out how they do it and to whom they're selling.
(Video package begins)
FARR voiceover: Julia Faust is in her 40s and recently made the difficult decision to move her mother in to a Sunrise Assisted Living residence. For Julia this was more a decision of the heart (rather) than of the pocketbook, and appearances counted for a lot.
JULIA FAUST: When you drive up, it's a Victorian type house look, which I think is lovely. So it looks more like a home than a facility, number one. Number two, you have the concierge right there.
They're very friendly, very nice, wonderful people, and you have the dog, Anya the dog. My mother loves dogs, and there you get back again to this feeling of a home and not a facility. Went to her room, showed her her room, beautiful view of the woods, just a very nice bright room.
And by putting one's parent into assisted living, a child is not abdicating their responsibility to the parent, that, you know, it's not as if, well, here you go; I'm never going to see you again, wham. It's where she's going to sleep, she's going to eat, she's going to have her needs met. But you know, it's still like an apartment.
FARR: What was important when you were looking for an assisted lining facility for your mother?
FAUST: The general environment. It's an environment where people are friendly. She can go downstairs. She can go to the bistro, have coffee, talk to people.
It's a nice environment. Your first impression anytime you walk into a place, it's going to have an impact, either positive or negative. It's a home-like environment. It's also very clean. It's not cluttered, and I think it's reminiscent to a lot of people of a better and more simpler time, so I think the older people like that and I like it even at my age. So I think we all can appreciate that.
FARR voiceover: Julia's positive impressions of the residence didn't happen by accident. Sunrise CEO Paul Klaussen explans that they know who really makes this crucial decision for mom and dad.
PAUL KLAUSSEN: People think about seniors are the consumer. The senior comes and lives in an assisted living community.
But very, very important to us is the relationship we have with the family members, because it's typically a 45-to-64 year old son or daughter, I have to say more often daughters and daughters-in-law, that are concerned about how is Mom or how is Mother-in-law doing? Is she getting the services she needs? And they are really in many ways the decision-maker or certainly the decision-influencer as to where Mother or Mother-in-law is going to live. So they are equally our customer.
FARR: How do you market to that 45-60 year old daughter?
KLAUSSEN: The quality of our buildings is a very important part of our outreach to the community. We build our buildings in usually highly trafficked areas, so they are quite visible. That's important because our residents want to fell that they are still part of the community.
And the architecture is also very important, so we use iconic architecture. On the East Coast it is usually a little more Victorian-looking with turrets and big porches and steeply gabled roofs. We blend in to what the vernacular of the architecture is in that region, but it has to be really a beautiful building.
Then word of mouth is extremely important. Nothing is more efficient also for us then to gain residents through happy customers. We don't have to spend much money then on media advertising, we don't. We are really interested in establishing in the zip code in the neighborhood. We tend to draw almost all of our family members and residents from about a 5-mile ring right around the Sunrise community where it is located.
The setting is important, and in our case that means a very residential, no fluorescent lights, no institutional finishes and combine with that services delivered in a way that really honor the senior. Ultimately the family member has to have confidence that that quality of life that they are looking for their loved one can occur in this setting.
FAUST: I come here almost every day, I have lunch with her. I spend a few hours with her. It's not unlike living in my home to a certain extent. It's just that I'm not doing the everyday functions of bringing her breakfast or changing her bed or vacuuming the carpet, that kind of thing. It's really quality time, and I think that's very important.
(Video package ends)
FARR: And Karen, these assisted living companies and senior care companies are a lot more than just sort of feel-good, pretty houses, let's-make-everybody-feel-good-inside and pretty décor.
They're serious businesses with serious marketing strategies. Sunrise knows that they're going to market and sell to that 45- to 55-year-old woman, that daughter or daughter-in-law -- be nice to your daughter-in-law, because she could be making that decision for you. They want to make sure that the décor appeals to the daughter-in-law, so that they provide some kind of guilt-free, or very low guilt on the scale, opportunity for that decision to place Mom in assisted living. Mom, the octogenarian, isn't going to like it. She's going to walk through and say, "I don't like it. I want to go home."
You know, so they are very effective marketers. They market in magazines that are going to be read by 45- to 55-year-old women. They go to local hospitals and churches and say, "Here we are. Come visit." But it's a real strategy, and they're very good at it.
GIBBS: Well, let's talk about this industry. We're also joined by Jerry Doctrow who follows these trends for Legg Mason. Jerry, is this Sunrise facility that we just saw representative of senior housing?
JERRY DOCTROW: It's representative I think of one type of senior housing. These would all be called assisted living facilities, which are really designed for, you know, a frail senior, but there's a range of facilities around that.
Independent living would be a facility that has larger apartment units, probably a little less services, designed for a slightly more active senior. That's another alternative. There are what are called continuing care retirement communities, CCRCs, which do independent, assisted, and nursing on the same level, as well as the more traditional nursing home. But even there I think the facilities are probably changed from what you might have seen five or 10 years ago. They've gotten a lot more I think customer friendly, driven by changes like what you've seen at Sunrise Assisted Living.
GIBBS: What's behind this demand now for senior housing?
DOCTROW: There was a large group of people born in the 1920s that are now passing 85. That's the group that's driving demand for senior housing. The Klaasens, the founders of Sunrise, really were instrumental in developing sort of a more residential-oriented, more customer-friendly type of senior housing that I think provided options that the old nursing home just didn't.
FARR: What can I buy now? You have any picks, any companies that we could invest in now?
DOCTROW: I think one of the things that's important about its investment theme is that the aging of this population, the old, elderly population, is driving demand for a number of services, both assisted living, but also nursing care.
The company in that space we like the best right now is a company called Kindred Healthcare. KND is the ticker. Again, just below a $1 billion market cap company. We think it's attractively valued and has upside. There's a little uncertainty in reimbursement in nursing care where the government does pay, you know, early next year, but we think in Kindred's case that's priced into the stock.
Some of the other opportunities we see are in home nursing. There's a company, Gentiva, GTIV is the ticker. A smaller market cap, only about $400 million. It provides home nursing care, announced a program just the other day to do more cardiac care for people, post-cardiac care in the home. I think that's an interesting model.
And the final company we like is a company called Apria, AHG, which is in the home respiratory business, providing home oxygen, medications for lung function. And that also, there's been some issues about reimbursement. We think they're well positioned and for a more managed care environment and attractively priced.
FARR: How big a company is Apria?
DOCTROW: Apria is about $1.5 billion. So these are small-cap companies by Wall Street standards. I think that's the nature of the industry, but I think they have significant growth potential in our opinion.
GIBBS: Well, with the numbers of baby boomers increasing, those elderly citizens, whether they're the Roaring Twenties boomers or the ones just beneath that growing, are we now going to see a rise in say maybe housing, REITs for seniors?
DOCTROW: The boomers, of which I'm included, are starting to drive demand for general healthcare use, but are certainly a long way away from sort of senior housing. But both of them are having an influence.
Some of the other companies I follow are healthcare REITs, real estate investment trusts, that own nursing homes, own assisted living, may own medical office buildings as well. That's another alternative for I think an investor that believes in some of these trends we've been talking about, but maybe looking for more of an income stock to purchase.
I think on the REIT side, again REITs have had a couple of very strong years here, so it's harder to find great values. I think a couple of the names that we like probably best in that space again are also small-cap. There's a company called LTC Properties out of California, LTC is the ticker, that's, you know, a mid-6 percent dividend yield and I think has some good earnings growth potential and also some good dividend growth potential. Ventas, VTR, is another one. They're very closely tied to Kindred, so there's some interrelationships there. That's less of a value play as there are some specific things about that stock that we think are attractive.
GIBBS: A fascinating and very timely discussion. Jerry Doctrow, Michael Farr, thank you very much.
FARR: Thank you.
DOCTROW: Thank you.
NEXT WEEK: Inside the world of Morningstar
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