When it comes to booking online travel, Priceline.com (NASDAQ: PCLN) and Orbitz (NASDAQ: OWW) are among the biggest players. And with U.S. economic growth at a mere 2.5% in the third quarter, it seems reasonable to assume that travelers would be flocking to these sites to save money. So, should you invest in or avoid these two stocks?
Priceline will report its third-quarter earnings after Monday’s close, and those results are expected to be explosive. Analysts forecast an 85% spike in revenue to $1.42 billion and an 82% EPS rise to $9.02. During its second quarter, 50% of Priceline’s revenue came from outside the U.S. — a 90% increase over 2010.
Priceline must be doing something right because it’s growing much faster than the industry. According to an April 2011 eMarketer forecast, online travel sales in the U.S. were forecast to increase a relatively paltry 8.5% in 2011 to $107.4 billion — then rising a somewhat faster 11% in 2012.
I found it interesting that eMarketer expects online travel revenue growth will mainly result from rising airfares. Specifically, it sees a 5.9% rise in the average amount booked online, going from $1,145 in 2011 to $1,213 in 2012. But another source of growth is greater air traffic: eMarketer forecasts that 4.7% more people are expected to book travel online — rising from 93.9 million in 2011 to 98.3 million in 2012.
And Priceline is holding on to its No. 2 market rank as people look to cap how much they pay to travel. As of Oct. 8, its 10.11% of visits kept it just behind market leader Expedia (NASDAQ: EXPE), which has 12.54%, and ahead of Orbitz (7.54%), according to Experian Hitwise.
In contrast to Priceline, however, Orbitz is growing at half the industry rate. Its net income for the third quarter, reported Nov. 3, fell 37% to $11.2 million, but its EPS of 11 cents beat analyst estimates by six cents a share. Revenue was up 4% in the quarter to $202.9 million.
But Orbitz seems to be struggling with a range of strategic issues from costs that are too high to legal disputes with suppliers. For example, Orbitz incured $7.3 million in contract labor costs, its marketing expenses rose 8% to $61 million and most troubling — its overhead costs increased 17% to $67.7 million.
So, here’s what the question of whether to invest in Priceline and/or Orbitz boils down to:
- Priceline: rapid growth, highly profitable; reasonably priced stock. Priceline’s sales have increased 31.9% in the past 12 months to $3.65 billion. while net income rose 7.8% to $720 million — yielding an impressive 19.8% net profit margin. Its price-earnings-to-growth ratio of 1.18 (where a PEG of 1.0 is considered fairly priced) is reasonable on a P/E of 36.4 and expected EPS growth of 30.8% to $28.31 in 2012.
- Orbitz: slow growth, unprofitable; dirt cheap stock. Orbitz sales have increased 2.6% in the past 12 months to $772 million, while it lost $69 million. Its PEG of 0.09 is extremely cheap on a forward P/E of 24.8 and expected earnings growth of 288% to $0.12 in 2012.
Both Priceline and Orbitz are risky bets at this point — but for different reasons. Priceline is poised to plunge unless it beats expectations and raises guidance. But based on its recent performance, chances are good it will do just that, leading to a rising share price. When it has beaten in recent quarters, its stock has risen nearly 10% in the aftermath.
Orbitz appears to be in a weak position strategically, but it could be a tempting acquisition target for a larger competitor. If it survives through 2012 and actually achieves its earnings growth forecast, its stock would be screamingly attractive at this level. But given its most recent report, it appears to be having significant management problems.
I would consider investing in Priceline and avoiding Orbitz.
Peter Cohan has no financial interest in the securities mentioned.
