Travel + Leisure currently trades at $62.98 per share and has shown little upside over the past six months, posting a middling return of 1.4%. The stock also fell short of the S&P 500’s 7.1% gain during that period.
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Why Do We Think Travel + Leisure Will Underperform?
We don't have much confidence in Travel + Leisure. Here are three reasons there are better opportunities than TNL and a stock we'd rather own.
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 161,000 in the latest quarter, and over the last two years, averaged 2.7% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Travel + Leisure’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Travel + Leisure’s $7.89 billion of debt exceeds the $254 million of cash on its balance sheet. Furthermore, its 8× net-debt-to-EBITDA ratio (based on its EBITDA of $1.01 billion 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
Travel + Leisure doesn’t pass our quality test. With its shares underperforming the market lately, the stock trades at 8.3× forward P/E (or $62.98 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. Let us point you toward the Amazon and PayPal of Latin America.
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