Travel stocks gain from wet end to summer

A UK summer cut short by downpours will boost shares in tour operators, with people scrambling for last-minute bookings abroad, while pub stocks look vulnerable as venturing outdoors loses its appeal.

After saying in April that the country was "odds-on for a barbecue summer", the Met Office revised its forecast end-July, predicting near or above average rainfall across the UK for the rest of the summer.

While June witnessed fine weather, the following month Britons were clutching their umbrellas, enduring the fourth-wettest weather in July since records began in 1914.

But UK sun lovers, no longer constrained by such unfavourable currency movements as a short while ago, are now better able to make good their escape abroad.

"Sterling's strengthened quite a bit and of course if the weather turns round as well, maybe people will decide to go somewhere else" said Justin Urquhart Stewart, director at Seven Investment Management.

Sterling has risen about 11 percent against the euro since the start of the year.

Updates from travel firms Thomas Cook and TUI Travel, last week showed a pick up in and since May for summer 2009 bookings from UK and Northern European customers, helped by the miserable weather, which will be reflected in their full-year results, scheduled for release in December.

"No doubt, if it had been a very hot summer, maybe the booking profile would have looked a little bit different and a little worse for them" said Greg Johnson, analyst at Shore Capital. 

TUI and Thomas Cook have reduced the number of holidays they sell by more than a quarter in the past two years because of the recession, enabling them to raise selling prices and avoid offering heavy late discounts to fill empty slots.

This has helped them to increase their profits while smaller operators have struggled to stay afloat. Britain's third-biggest travel firm, XL Leisure, went into administration last year.

Shares in TUI and Thomas Cook are cheap relative to peers. Thomas Cook has a forward price-to-earnings of 8.39, while TUI Travel trades at 9.95 times. That compares with 11.63 for the DJ STOXX European travel & leisure index.

Thomas Cook has risen nearly 18 percent so far this year, while TUI Travel has ticked up 1.1 percent. Britain's FTSE 100 has risen 5.3 percent.

NO CHEER FOR PUBS

But pub shares, which have rebounded this year after a poor 2008, may have little steam left. Mitchells & Butlers has jumped nearly 70 percent this year, while Punch Taverns has gained 86 percent.

Rainy weather forces drinkers to stay at home and pubs groups will take a hit.

"Clearly they would like to have clear skies, particularly the ones who have really gone out there and actively bought up sites with outside space... someone like Greene King and Marston's would have been hoping for a good deal better weather" said Charles Stanley analyst James Dawson.

Numis Securities cut its 2009 forecast for Punch Taverns, Britain's biggest pub operator, by almost 5 percent ahead of the firm's trading statement next week. 

The downgrade is "half-half due to higher interest costs as recently raised cash and incremental disposal proceeds are being temporarily held on deposit half due to our caution relating to poor weather in July (and potentially in August)" said the broker in a note.

Beverage producers, too, would have preferred a better weather outlook, though their summer 2009 should still compare favourably with the poor summer 2008.

"In general, the beverage companies receive a 5 percent plus uplift in volumes on the back of a good summer and therefore we expect an uplift of about 1 percent this year against weak comparatives" said Shore Capital in a recent research note.

Bad weather keeping people at home is good for food delivery chains such as Domino's Pizza, whoe shares are up 38 percent this year.

SHOPS CASH IN

For retailers, this summer's mixed weather has proved advantageous, reflected in the closely watched British Retail Consortium's retail sales surveys, which for June and July show like-for-like sales rose 1.4 percent and 1.8 percent, respectively, compared to the same months last year.

"The weather was good early in the season, so there's more sales at full price, so they've got that war chest for clearing stuff out later in the season" said David Stoddart, analyst at Altium Securities, referring to fashion retailers.

For furniture and homeware shops, often housed in large metal sheds which are unpleasant in the hot weather, rain is beneficial, he said, as it takes the mugginess out of the air, lifting customer numbers.