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2 travel stocks to buy for the tourism boom

IBISworld forecasts that the $124 billion Australian tourism industry will grow at an annualised 2.7% over the next five years, positioning it to become Australia’s economic backbone by 2020.

This puts the industry on track to outperform Australia’s forecast GDP growth of 2.5% over the same period, implying that inbound and outbound tourism will be the growth engine for Australia’s prosperity until the next decade.

This trend means entertainment and travel-related companies like Ardent Leisure Group (ASX: AAD), Village Roadshow Ltd (ASX: VRL) and Webjet Limited (ASX: WEB) should see boom-time conditions like those experienced by BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) during the mining boom.

Accordingly, savvy investors will do well by picking stocks leveraged to this economic cycle.

In this regard, I believe Flight Centre Travel Group Ltd (ASX: FLT) and Sydney Airport Holdings Ltd (ASX: SYD) provide the best value to ride the tourism trend, at the current time.

Flight Centre

As I wrote here last week, Flight Centre shares appear cheap amidst general market pessimism towards the sustainability of its business model.

Nevertheless, as highlighted in that article, Flight Centre has numerous growth options ahead of it, such as vertical acquisitions like the 49% stake in Ignite Travel Group it announced to the market on Wednesday afternoon.

With Flight Centre’s shares currently trading on a consensus forward price-earnings of 13.5x, and offering a robust fully-franked yield of 4.5%, the growth opportunity that lies ahead of it is compelling at current prices.

As such, it remains a buy in my books.

Sydney Airport

IBISworld estimates that New South Wales accounts for approximately 34.5% market share of Australia’s total tourism spend, citing marquee tourist attractions like the Sydney Opera House, Sydney Harbour Bridge and Bondi beach as the key draw cards to this state.

Sydney Airport is best positioned to capitalise on this fact by being the operator of Sydney’s international airport – Kingsford Smith.

With Sydney Airport reporting international and domestic tourism increased 5.8% year-on-year to July 2016, any additional increase to tourism augurs well for total passenger movements. This means Sydney Airport should continue to grow earnings on the back of Australian tourism growth.

As highlighted here, I am cognisant that Sydney Airport trades at a lofty price-earnings multiple. However, if management can maintain Sydney Airport’s current year distribution growth of 20% for the next few years, the recent pullback in share price makes Sydney Airport shares cheap today.

Foolish takeaway

Whilst companies like Qantas Airways Limited (ASX: QAN) and Virgin Australia Holdings Ltd (ASX: VAH) offer direct exposure to the upcoming tourism boom, I believe their current shares prices and reliance on external factors (like crude oil prices) leave no room for error.

Instead, investors should focus on companies which are ancillary beneficiaries to increased tourism, such as stocks like Ardent Leisure, Crown Resorts Ltd (ASX: CWN), Mantra Group Ltd (ASX: MTR), Flight Centre and Sydney Airport.

With the latter two trading on attractive valuations, in my opinion, investors seeking exposure to this sector should start with them first.

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Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.