Travel + Leisure’s 27.6% return over the past six months has outpaced the S&P 500 by 25.1%, and its stock price has climbed to $75.83 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy Travel + Leisure, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Do We Think Travel + Leisure Will Underperform?

We’re glad investors have benefited from the price increase, but we don't have much confidence in Travel + Leisure. Here are three reasons you should be careful with 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 184,000 in the latest quarter, and over the last two years, averaged 2.2% 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. Unfortunately, Travel + Leisure’s ROIC has decreased over the last few years. 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 $7.76 billion of debt exceeds the $253 million of cash on its balance sheet. Furthermore, its 8× net-debt-to-EBITDA ratio (based on its EBITDA of $990 million 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 falls short of our quality standards. With its shares topping the market in recent months, the stock trades at 10.3× forward P/E (or $75.83 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.

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