Travel & leisure discussion: Jan. 17, 2003
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GIBBS: The travel and leisure industry is growing faster than the entire U.S. economy, which has helped Mark Greenberg's INVESCO Leisure Fund outperform the S&P for the past 15 years. Over the past five years he's provided investors with a 13 percent return and having a ton of fun while doing it, even with his clothes on.
 Dave Anders has been ranked by Institutional Investor as one of the top gaming and lodging analysts for the past five years, but he says he's not much of a gambler, preferring to look at the bigger trends.
Gentlemen, welcome.
David, let's talk about these bigger trends. What are you seeing?
ANDERS: What we're seeing right now is two significant trends. One's a long-term trend, which is what you mentioned. Growth will continue in leisure spending, primarily because of the aging population. But we also have some near-term trends, which is still a soft economy, unemployment's creeping up. And so you're seeing a little softness in the near term, but long term the trends look great.
GIBBS: Mark, do you agree with the growth potential in this industry?
GREENBERG: Yes. I think we've seen this for a long time, that everybody's taking more vacations than their parents did, they're buying more toys than their parents did, buying more jewelry. People like to spend money on themselves, and I think this is a worldwide trend that's going to continue.
GIBBS: But there are a couple of big ifs, particularly if consumer spending stops, right?
GREENBERG: Well, consumer spending is going to be affected by the economy in the short term. But talking about the longer-term trends, with our Leisure Fund our turnover is very low. We're buying our stocks for a three- to four-year holding period, so we're really trying to figure out what's going to be happening in a couple of years, not what the next quarter is going to bring.
GIBBS: And, Dave, you mentioned a near-term cloud or uncertainty, and that's this specter of war with Iraq. Tell us how that might play out.
ANDERS: Yeah, exactly. What we're finding is a lot of investors agree that the big-term trend is very positive for leisure, but they want to wait. They believe that we might have a little bit of a repeat of 1991, which was the leisure stocks sold off into the initiation of military action, and then ultimately started to appreciate almost immediately following the cessation of aggression. So investors are kind of on the sidelines right now. We think you need to do your homework, and if there is a dip, we'd be aggressive buyers.
GIBBS: Of any particular stocks, or...
ANDERS: Well, we actually like, on the hotel side, Hilton and Starwood. On the gaming side, we're still recommending Harrah's and MGM. And those would be the top four.
GIBBS: And I know we're going to talk about that a little bit more. Mark, going back to you and your picture, you were talking about the near-term trends as well. Where would you suggest investors to put their money?
GREENBERG: Well, one thing I would tell investors is that it's hard to really predict the short term what's going to happen. Will there be war? Possibly, but how is the stock market going to react? I don't think any of us can really figure those things out, and I think it's better to figure out what companies are best positioned for the next couple of years.
 Because what will probably happen to most investors is, all right, now the war's started, we've got some bad news, the stocks are down, but I'm worried about the stock market. I'm not going to buy them then either, and I think it's too hard to make those picks.
But I see certain companies in the gaming and lodging travel businesses that I think are very well positioned. International Game Technology, the slot machine company, is one of our biggest holdings. They have the biggest slot machine share in any of the casinos around the world, and there's a lot more gambling going on around the country. And they generate a lot of free cash. They're going to do well. And Harrah's Entertainment, the casino company, I also like a lot. That's also one of my biggest holdings. Both of those stocks we've held for several years and made a lot of money for our shareholders.
GIBBS: Well, we're going to come back to that, because I know both of you follow closely one of the biggest names in the hotel industry, and that's Hilton. And Geoff, my co-anchor, talked with (Hilton CEO) Stephen Bollenbach this week about Hilton. Let's listen:
(Earlier interview)
GEOFF COLVIN: Steve, the travel industry has just been getting back on its feet lately, and now we have the threat of war perhaps imminent, a terrorism threat that isn’t going away. How big a problem is that?
STEPHEN BOLLENBACH: Well, I think you need to kind of think of a definition first of a war if it comes.
 I think the problem for us will be defined in terms of whatever the objectives of the war are. You know, at the one end if the objectives are to occupy and run Iraq, that’s I believe going to be a long-term problem for the entire nation. If the objective is simply to change the government, that would probably be a lot more like the war of 11 years ago, which for our industry was a sharp, short decrease in business. And so I think, and mind you, it’s more likely to be that kind of objective, limited objectives. And so I don’t think that that should be a terrible event. In terms of the terrorist activity, I think it’s unknowable. And therefore, I don’t think as a business person, as it relates to our business, we really need deal with it.
COLVIN: To some extent you’re a leading economic indicator in that you can look at what people are booking now. Travel agents say that a lot of families book summer vacations at this time of year. When you look ahead, what are you seeing for the economy?
BOLLENBACH: Well, I’m sad to report that I thought that we would see some real strength by now. And it’s not bad, but I don’t see a return to the kinds of levels that we had in the late ‘90s. And, you know, we remain hopeful, and as I say, it’s not bad. But we want to see that year 2000 again where we made record profits as an industry, and we’d like to do that again.
COLVIN: Yeah, everybody wants to see 2000 again.
BOLLENBACH: Absolutely, absolutely.
COLVIN: Looking at sort of bigger trends, it seems that vacations are evolving. They’re not what they used to be. They’re changing. What trends do you see in that department?
BOLLENBACH: We have a population that’s getting older and richer and they have more time and more money. So, you know, vacation travel is going to be more and more, and it already is such a popular form of personal entertainment, but it’s going to be more and more in the future. So that again is another good position for the hotel business.
COLVIN: Some people said that after 9/11, business travel was going to change perhaps permanently, or at least in a long-term way. Business travel is highly profitable travel for a company like yours, very important. What changes have you seen? And is there a permanent shift?
BOLLENBACH: Well, I don’t believe there’s a permanent shift. I think the change that we see is a continuing trend to what we saw before 9/11, in the months before 9/11. We saw the economy slowing down. And business travel is something that companies always pull back on when their earnings are under pressure. But I don’t think the fundamental of travel, which is two people getting together to talk about a transaction, has changed.
COLVIN: How does the turmoil that the airlines are going through affect you and the other elements in the travel industry?
BOLLENBACH: Well, the problems with the airlines is certainly not good for the hotel business. You know, we benefit from high travel, and we’ll be happy when the airlines can be more healthy.
COLVIN: When you look at your business for the coming few years, what are the biggest opportunities you see?
BOLLENBACH: Well, for us the biggest opportunity is that we have spent a huge amount of money on our systems and on technology in general over the past few years. And our biggest opportunity to compete against the other big companies in our industry, which is Marriott and Starwood, is that I think we’re well ahead of them in terms of our ability to provide guest services and our ability to control costs and our ability to use all these wonderful things that are now available to people.
COLVIN: Interesting. Now, when you look at the next few years, what are the biggest risks that you see?
BOLLENBACH: Well, you know, honestly the biggest risk is that one that’s unquantifiable, is what will be the impact of these coming terrorist events? And it is unquantifiable, so we just need to set that aside. And beyond that there are no great commercial risks, I don’t think.
COLVIN: When you look at the cities the people are traveling to, what’s hot? What are the next hot cities?
BOLLENBACH: Well, I’ll tell you the hottest city, and it may be a little of a surprise, but it’s New York City. We are having a record year here at the Waldorf and we’re having a record year at the New York Hilton, and these are our biggest hotels in New York.
(End Bollenbach interview)
GIBBS: So besides the Big Apple, where are people headed these days? Topping the list is the house the mouse built, Orlando, Florida, followed by Las Vegas and New York. Internationally, the hot spots are London, Cancun and gay Paris. We're joined again by money manager, Mark Greenberg, and Merrill Lynch analyst, Dave Anders.
Well, Dave, let me ask you, what do you think about Hilton?
ANDERS: We actually have a “buy” (rating) on Hilton. I like the lodging stocks. I like the fact that supply growth is slowing in the industry. And I think in the second half of this year, if we get any type of pickup with demand, you'll see nice pricing gains and the stocks will work.
GIBBS: Mark, you mentioned before the package that you liked Hilton, but isn't the hotel business dependent on business travel, which has been kind of soft recently?
GREENBERG: Well, but we know business travel is soft. You can't think about just what's going on in the short term. You've got to think about what's going to happen down the road. And I think that Hilton has done a good job with its business model. And we bought Hilton stock last year and we added to our position just in the last few weeks. I think they're going to do well over the next couple of years. They're going to make a lot of money in it.
GIBBS: How about those huge hotels on the sea, the cruise lines. What about some of those?
ANDERS: Cruise lines are facing a little bit more pressure and they have some more supply coming on, about 10 percent growth in capacity this year, 12 percent growth next year. So for companies that operate there, they are faced with a bit more of a daunting task, especially if the economy is still soft and leisure travel is pulling back a bit.
GIBBS: Mark, is overcapacity a real big issue in that area as well?
GREENBERG: It's not just the overcapacity today. It's the overcapacity that's going to be coming the next few years or so. We're not owners of the cruise lines. I think there are better opportunities for vacation travelers to both have fun and to invest in the stocks in Las Vegas.
GIBBS: Let's talk about those fun things. Where do you see some action in Las Vegas?
GREENBERG: Well, one of the interesting things about Las Vegas is it's grown to be the biggest convention market in the United States and there's a lot of convention space added. And I don't know how much work people get done when they go to a convention in Las Vegas, but everybody seems to like going there, and it's certainly very profitable for the casino companies. So Harrah's is really the one I would focus on. They've got a big business in Las Vegas. And they're also, what I really like though about Harrah's is they're diversified around the country. They've got 26 casinos in their big markets like Las Vegas and Atlantic City, but smaller markets like Joliet, Illinois and Tunica, Mississippi.
GIBBS: Let's talk about those smaller markets and those smaller trends. You know, a lot of people don't want to go far away from home with this specter of uncertainty. What are you seeing as some of the local trends, Dave?
ANDERS: Well, right now we're anticipating modest growth in the local market for next year. But you're right. If there's any type of military action or people do stay home, you should see those properties, the local river boat casinos really benefit. Post-9/11, that quarter, quarter four and quarter one, performance was outstanding and Harrah's and the rest of the river boat stocks did extremely well. That could happen again.
GIBBS: How about speedways? I see a lot of interest in NASCAR and even in NHRA, and that's right around the corner for lots of people.
 ANDERS: Right, right. And those properties will do well if people stay home as well. The issue there and the reason we have holds on some of those stocks is really the fact that corporate spending or corporate sponsorship is a critical piece of the equation, and that could trail off a bit as corporations look to curtail advertising spending.
GIBBS: How about you, Mark? Do you see any fun things going on right around the corner?
GREENBERG: Well, I would avoid the race track stocks, too. I haven't owned those. They've really been poor performers over the year, and I think they're going to have a tough time making money.
GIBBS: But you're hearing a lot about states having trouble meeting their budget deficits and bringing up the slots now with the racinos. Anything on your radar there?
GREENBERG: The big beneficiary of the spread of slot machines, which is going to happen across the United States this year and next year -- Maryland is probably going to have slots, Pennsylvania, Massachusetts, Rhode Island, and there's a huge expansion in slots in California at the Indian casinos -- is International Game Technology. They've got the biggest share in the slot machine business in the United States, for that matter worldwide. Their share is increasing. One of the things I always look for in running the INVESCO Leisure Fund is finding companies that are expanding their market share. Because if you can expand your market share, that shows you're doing something well. Now the casinos all say IGT charges too much, but frankly that's good to hear from my view.
GIBBS: And I know that's one of your top holdings, but tell me about yours. You or your company, do you own personally any of the stocks that you've mentioned.
ANDERS: No, I do not.
GIBBS: And how about Penn? That was one of the racinos that you were interested in.
ANDERS: Yeah, Penn National is a very interesting company. They have several casinos in the southeastern United States, but more importantly they have two race tracks in Pennsylvania. And as Mark said, Pennsylvania is one of the most likely states to move forward on gaming. If that occurs, it should be a home run for Penn, so it's one of our favorites.
GIBBS: All right. Dave Anders, Mark Greenberg, thank you very much for joining us.
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